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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
Date of revision:
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
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