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Path dependent coordination of expectations in asset pricing experiments: A behavioral explanation

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  • Agliari, Anna
  • Hommes, Cars H.
  • Pecora, Nicolò

Abstract

In the learning-to-forecast laboratory experiments in Hommes et al. (2005), three different types of aggregate asset price behavior have been observed: monotonic convergence to the stable fundamental steady state, dampened price oscillations and permanent price oscillations. We present a simple behavioral 2-type heuristics switching model explaining individual as well as aggregate behavior in the experiment. Based on relative performance, agents switch between a simple trend following and an anchor and adjustment heuristic that differ in how much weight is given to the long run average price level. The nonlinear switching model exhibits path dependence through co-existence of a locally stable fundamental steady state and a stable (quasi-)periodic orbit, created via a so-called Chenciner bifurcation. Depending on initial states, agents coordinate individual expectations either on a stable fundamental steady state path or on almost self-fulfilling persistent price fluctuations around the fundamental steady state.

Suggested Citation

  • Agliari, Anna & Hommes, Cars H. & Pecora, Nicolò, 2016. "Path dependent coordination of expectations in asset pricing experiments: A behavioral explanation," Journal of Economic Behavior & Organization, Elsevier, vol. 121(C), pages 15-28.
  • Handle: RePEc:eee:jeborg:v:121:y:2016:i:c:p:15-28
    DOI: 10.1016/j.jebo.2015.11.001
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    References listed on IDEAS

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    1. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
    2. Mikhail Anufriev & Cars Hommes, 2012. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(4), pages 35-64, November.
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    Cited by:

    1. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 15-38.
    2. Simone Berardi & Gabriele Tedeschi, 2016. "How banks’ strategies influence financial cycles: An approach to identifying micro behavior," Working Papers 2016/24, Economics Department, Universitat Jaume I, Castellón (Spain).
    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.

    More about this item

    Keywords

    Multi-agent systems; Asset pricing model; Experimental economics; Coexistence of attractors; Expectation feedback;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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