Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices
AbstractThis paper analyzes the dynamics of a general explicit random price process of finitely many assets in an economy with overlapping generations of heterogeneous consumers forming optimal portfolios, extending the one dimensional investigation of Bohm, Deutscher and Wenzelburger (2000). Consumers maximize expected utility with respect to subjective transition probabilities defined by Markov kernels. Given a forecasting rule (predictor) and an exogeneous stochastic process of producer dividends, the dynamics of the economy is described as a random dynamical system in the sense of Arnold (1998). The paper investigates existence and stability of random fixed points (invariant measures) for mean-variance preferences under various forecasting schemes, including unbiased predictions as well as OLS forecasting. Numerical simulations show the stability and the performance of the different predictors for linear mean-variance preferences. Alternative random dividend processes are provided.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 46.
Date of creation: 01 Oct 2000
Date of revision:
random dynamical systems; expectations; learning; random asset pricing; mean variance preferences;
Other versions of this item:
- Volker BÃ¶hm & Carl Chiarella, 2005. "Mean Variance Preferences, Expectations Formation, And The Dynamics Of Random Asset Prices," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 15(1), pages 61-97.
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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