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Bifurcation Routes to Volatility Clustering under Evolutionary Learning

Listed author(s):
  • Gaunersdorfer, A.

    (University of Vienna)

  • Hommes, C.H.
  • Wagener, F.O.O.

    ()

    (Universiteit van Amsterdam)

A simple asset pricing model with two types of adaptively learning traders, fundamentalists and technical analysts, is studied. Fractions of these trader types, which are both boundedly rational, change over time according to evolutionary learning, with technical analysts conditioning their forecasting rule upon deviations from a benchmark fundamental. Volatility clustering arises endogenously in this model. Two mechanisms are proposed as an explanation. The first is coexistence of a stable steady state and a stable limit cycle, which arise as a consequence of a so-called Chenciner bifurcation of the system. The second is intermittency and associated bifurcation routes to strange attractors. Both phenomena are persistent and occur generically. Simple economic intuition why these phenomena arise in nonlinear multi-agent evolutionary systems is provided.

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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 03-03.

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Date of creation: 2003
Handle: RePEc:ams:ndfwpp:03-03
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