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Asset Price and Wealth Dynamics under Heterogeneous Expectations

  • Xue-Zhong (Tony) He

    (University of Technology Sydney)

  • Carl Chiarella

    (University of Technology Sydney)

In order to characterise price and wealth dynamics under the interaction of heterogeneous agents with a CRRA utility, a discrete time stationary wealth dynamics model in terms of return and wealth proportions (among different types of agents) is established. Fundamentalists and chartists are the main heterogeneous agents in the model. It is found that the presence of heterogeneous agents can lead the stationary model to have multiple equilibria. The equilibrium is unstable when the chartist extrapolation rate is high and (locally) stable when the rate is low. The convergence to the equilibrium follows an optimal selection principle --- the return and wealth proportion tends to one of the equilibria, which has relative higher return. The model that is finally developed displays the essential characteristics of the standard asset price dynamics model assumed in continuous time finance in that the asset price is fluctuating around an geometrically growing trend.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Workshop Papers, January 2001 with number 5A.2.

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Date of creation: 04 Jan 2001
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Handle: RePEc:ams:cdws01:5a.2
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
Web page: http://www.fee.uva.nl/cendef/
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  1. Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics.
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  7. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
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  13. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
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  15. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
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  25. repec:att:wimass:9706 is not listed on IDEAS
  26. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2000. "Bifurcation Routes to Volatility Clustering," CeNDEF Working Papers 00-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  28. Chiarella, Carl & He, Xue-Zhong, 2003. "Heterogeneous Beliefs, Risk, And Learning In A Simple Asset-Pricing Model With A Market Maker," Macroeconomic Dynamics, Cambridge University Press, vol. 7(04), pages 503-536, September.
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  30. Carl Chiarella & Xue-Zhong He, 2001. "Dynamics of Beliefs and Learning Under aL Processes - The Homogeneous Case," Research Paper Series 53, Quantitative Finance Research Centre, University of Technology, Sydney.
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