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Informational differences and learning in an asset market with boundedly rational agents

  • Diks, C.G.H.

    ()

    (Universiteit van Amsterdam)

  • Dindo, P.D.E.

    ()

    (Sant'Anna School of Advanced Studies, Pisa)

The price formation mechanism in an asset market with boundedly rational agents can be viewed as a filter acting on incoming news about economic fundamentals such as future dividends. Here we study the properties of an asset pricing market filter obtained under some simple behavioral assumptions, and examine the resulting dynamical structure of the fluctuations of the market price around the time-varying underlying fundamental reference price. The starting point is an asset pricing model in which agents can choose among two different degrees of information on fundamentals. At the same time agents are also learning the growth rate of the dividend generating process. This leads to prices that deviate substantially and persistently from the fundamental value in the short run but stay close to it in the long run. In particular, prices follow a time-varying nonlinear mean reverting dynamics which we show to be related to agents' interaction triggered by informational differences.

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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 06-11.

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Date of creation: 2006
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Handle: RePEc:ams:ndfwpp:06-11
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