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Volatility, Heterogeneous Agents and Chaos

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Author Info
Orlando Gomes (Escola Superior de Comunicação Social)

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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.

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Paper provided by EconWPA in its series GE, Growth, Math methods with number 0409010.

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Length: 18 pages
Date of creation: 28 Sep 2004
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Handle: RePEc:wpa:wuwpge:0409010

Note: Type of Document - pdf; pages: 18
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Related research
Keywords: Heterogeneous agents; Bounded rationality; Chaos; Volatility;

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Find related papers by JEL classification:
C61 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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