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Heterogeneous beliefs and adaptive behaviour in a continuous-time asset price model

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  • He, Xue-Zhong
  • Li, Kai

Abstract

This paper extends the analysis of the seminal work of Brock and Hommes (1997, 1998) on heterogeneous beliefs and rational routes to randomness in discrete-time models to a continuous-time model of asset pricing. The resulting model characterised mathematically by a system of stochastic delay differential equations provides a unified approach to deal with adaptive behaviour of heterogeneous agents and market stability impact of lagged price used by chartists to form their expectations. For the underlying deterministic model, we show not only that the result of Brock and Hommes on rational routes to market instability in discrete-time holds in continuous-time but also a double edged effect of an increase in lagged price used by the chartists on market stability. For the stochastic model, we demonstrate that the interaction and boundedly rational behaviour of heterogeneous agents can generate various market phenomena such as bubbles and crashes and replicate stylised facts including volatility clustering, and long range dependence in volatility.

Suggested Citation

  • He, Xue-Zhong & Li, Kai, 2012. "Heterogeneous beliefs and adaptive behaviour in a continuous-time asset price model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 973-987.
  • Handle: RePEc:eee:dyncon:v:36:y:2012:i:7:p:973-987
    DOI: 10.1016/j.jedc.2012.02.002
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    Citations

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    Cited by:

    1. Di Guilmi, Corrado & He, Xue-Zhong & Li, Kai, 2014. "Herding, trend chasing and market volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 349-373.
    2. Sandrine Jacob Leal, 2015. "Fundamentalists, Chartists and Asset pricing anomalies," Post-Print hal-01508002, HAL.
    3. He, Xue-Zhong & Li, Kai & Wang, Chuncheng, 2016. "Volatility clustering: A nonlinear theoretical approach," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 274-297.
    4. repec:eee:dyncon:v:91:y:2018:i:c:p:441-457 is not listed on IDEAS
    5. He, Xue-Zhong & Li, Kai, 2015. "Profitability of time series momentum," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 140-157.
    6. Kai Li, 2014. "Asset Price Dynamics with Heterogeneous Beliefs and Time Delays," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 13.
    7. Sandrine Jacob Leal, 2013. "Momentum effect in individual stocks and heterogeneous beliefs among fundamentalists," Economics Bulletin, AccessEcon, vol. 33(4), pages 3102-3116.
    8. Li, Shaoyu & Wei, Lijia & Xu, Zhiwei, 2017. "Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations," Economic Modelling, Elsevier, vol. 61(C), pages 113-125.
    9. Gori, Luca & Guerrini, Luca & Sodini, Mauro, 2015. "A continuous time Cournot duopoly with delays," MPRA Paper 62300, University Library of Munich, Germany.
    10. Xue-Zhong He & Kai Li, 2014. "Time Series Momentum and Market Stability," Research Paper Series 341, Quantitative Finance Research Centre, University of Technology, Sydney.
    11. Lamantia, F. & Radi, D., 2015. "Exploitation of renewable resources with differentiated technologies: An evolutionary analysis," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 155-174.
    12. Sandrine Jacob Leal, 2015. "Fundamentalists, chartists and asset pricing anomalies," Quantitative Finance, Taylor & Francis Journals, vol. 15(11), pages 1837-1850, November.

    More about this item

    Keywords

    Heterogeneous beliefs; Bounded rationality; Adaptiveness; Fundamentalists; Chartists; Stability; Stochastic delay differential equations;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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