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Volatility, Heterogeneous Agents and Chaos

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  • Orlando Gomes

    (Escola Superior de Comunicação Social)

Abstract

Agent heterogeneity has been used in recent economic literature to justify nonlinear dynamics for the time paths of aggregate economic variables. In this paper, the mechanism through which heterogeneous agents leads to chaotic motion is explained. Adding to a system with initial behavior heterogeneity an adaptive learning rule based on discrete choice theory, one is able to encounter a reasonable explanation for nonlinear motion. The adaptive learning / bounded rationality rule is not the only ingredient necessary for the absence of a long run steady state; heterogeneity must also imply that the several behavior possibilities alternate as the best behavioral choice. Only in such circumstances heterogeneity persists and an unpredictable outcome is likely to arise. The paper develops two models. The first is a generic approach that exemplifies how heterogeneity concerning the volatility of two stochastic processes may lead to chaotic motion; the second is a utility maximization setup, where the source of heterogeneity is investment decisions.

Suggested Citation

  • Orlando Gomes, 2004. "Volatility, Heterogeneous Agents and Chaos," GE, Growth, Math methods 0409010, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpge:0409010
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    Cited by:

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    5. Gomes, Orlando, 2006. "Heterogeneous Researchers in a Two-Sector Representative Consumer Economy," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 60(2), November.

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    More about this item

    Keywords

    Heterogeneous agents; Bounded rationality; Chaos; Volatility;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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