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Communication, correlation of beliefs and asset price fluctuations

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  • Hiroyuki NAKATA

    () (School of Accounting, Finance and Management, University of Essex)

Abstract

This paper studies how communication amongst agents influences the equilibrium of a financial economy. We set up a standard overlapping generations (OLG) model with assets, while allowing for heterogeneous beliefs. The paper explicitly describes how communication generates correlation of beliefs, and show that communication can be embedded in the models of rational beliefs that do not model communication explicitly a priori. We confine our attention to a Markovian economy, in which the beliefs of the agents are all Markovian. Simulation results are provided to examine the effects of communication, while classifying the beliefs in accord to the reactions to communication.

Suggested Citation

  • Hiroyuki NAKATA, 2007. "Communication, correlation of beliefs and asset price fluctuations," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 115(3), pages 443-469.
  • Handle: RePEc:vep:journl:y:2007:v:115:i:3:p:443-469
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    More about this item

    Keywords

    Communication; Correlation of beliefs; Fluctuations; Heterogeneous beliefs; Rational beliefs;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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