Volatility, Heterogeneous Agents and Chaos
AbstractAgent 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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Length: 18 pages
Date of creation: 28 Sep 2004
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Heterogeneous agents; Bounded rationality; Chaos; Volatility;
Other versions of this item:
- Orlando Gomes, . "Volatility, Heterogeneous Agents and Chaos," The Electronic Journal of Evolutionary Modeling and Economic Dynamics, IFReDE - Université Montesquieu Bordeaux IV.
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-10-18 (All new papers)
- NEP-DCM-2004-10-18 (Discrete Choice Models)
- NEP-MAC-2004-10-18 (Macroeconomics)
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