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Asset Prices in an Overlapping Generations Model with Case-Based Decision Makers with Short Memory

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  • Guerdjikova, Ani

    ()
    (Cornell University)

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    Abstract

    I consider an economy, populated by case-based decision makers with one-period memory. Consumption can be transferred between the periods by the means of a riskless storage technology or a risky asset with iid dividend payments. I analyze the dynamics of asset holdings and asset prices. Whereas an economy in which the investors have low aspiration levels exhibits constant prices and asset holdings, investors with high aspiration levels create cycles, which may be stochastic or deterministic. Arbitrage possibilities, deviation of the price from the fundamental value, predictability of returns and excessive volatility are shown to obtain in a market with case-based investors.

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    File URL: http://www.sfb504.uni-mannheim.de/publications/dp04-44.pdf
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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 504, Universit├Ąt Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 04-44.

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    Length: 32 pages
    Date of creation: 24 Nov 2004
    Date of revision:
    Handle: RePEc:xrs:sfbmaa:04-44

    Note: I am indebted to my advisor Juergen Eichberger for his helpful guidance.
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    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
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