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Evolutionary Dynamics in Financial Markets With Many Trader Types

  • Brock, W.A.
  • Hommes, C.H.

    ()

    (Universiteit van Amsterdam)

  • Wagener, F.O.O.

    ()

    (Universiteit van Amsterdam)

This paper develops the notion of a Large Type Limit (LTL) describing the average behavior of adaptive evolutionary systems with many trader types. It is shown that generic and persistent features of adaptive evolutionary systems with many trader types are well described by the large type limit. Stability and bifurcation routes to instability and strange attractors are studied. An increase in the ``intensity of adaption'' or in the diversity of beliefs may lead to deviations from the RE fundamental benchmark and excess volatility. Simple examples of LTL are able to generate important stylized facts, such as volatility clustering and long memory, observed in real financial data.

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File URL: http://cendef.uva.nl/binaries/content/assets/subsites/amsterdam-school-of-economics-research-institute/cendef/working-papers-2001/ltlapril2001.pdf?1417180324756
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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 01-01.

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Date of creation: 2001
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Handle: RePEc:ams:ndfwpp:01-01
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Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands

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  7. Brock, W.A. & Hommes, C.H., 1997. "Models of Compelxity in Economics and Finance," Working papers 9706, Wisconsin Madison - Social Systems.
  8. Michele Boldrin & David K. Levine, 1999. "Growth Cycles and Market Crashes," Levine's Working Paper Archive 2028, David K. Levine.
  9. Brock, W.A., 1996. "Asset Price Behavior in Complex Environments," Working papers 9606, Wisconsin Madison - Social Systems.
  10. Baak, Saang Joon, 1999. "Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1517-1543, September.
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  12. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-64, December.
  13. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June.
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  16. Hommes, C.H. & Sonnemans, J. & Tuinstra, J. & van de Velden, H., 1999. "Expectation Driven Price Volatility in an Experimental Cobweb Economy," CeNDEF Working Papers 99-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  29. repec:cup:macdyn:v:4:y:2000:i:2:p:139-69 is not listed on IDEAS
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