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Asset price dynamics with small world interactions under hetereogeneous beliefs

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Author Info
Valentyn Panchenko () (School of Economics, University of New South Wales)
Sergiy Gerasymchuk () (Advanced School of Economics, University of Venice)
Oleg V. Pavlov (Department of Social Science and Policy Studies, Worchester Polytechnic Institute)

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Abstract

We propose a simple model of a financial market populated with heterogeneous agents. The market represents a network with nodes symbolizing the agents and edges standing for connections between them, thus, embodying local interactions in the market. By local interactions we mean any kind of interplay between the decisions of the agents unaffected by the market mechanism and unrelated to the physical distance between the agents. Using the rewiring procedure we restructure a network from regular lattice to random graph by varying the probability of the agents to switch from one trading strategy to another. We study how the network structure influences the asset price dynamics. The results show that for some intermediate values of the probability to switch, corresponding to a small world network, the price dynamics become reminiscent to the real. While for the boundary values of the probability the dynamics lacks some typical features of the real financial markets.

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Publisher Info
Paper provided by Department of Applied Mathematics, University of Venice in its series Working Papers with number 149.

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Length: 21 pages
Date of creation: Mar 2007
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Handle: RePEc:vnm:wpaper:149

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Related research
Keywords: local interactions; networks; small world; heterogeneous beliefs; price dynamics; bifurcations; chaos;

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Find related papers by JEL classification:
C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sergiy Gerasymchuk, 2008. "Asset return and wealth dynamics with reference dependent preferences and heterogeneous beliefs," Working Papers 160, Department of Applied Mathematics, University of Venice. [Downloadable!]
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