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Asset Price Dynamics with Local Interactions under Heterogeneous Beliefs

  • Gerasymchuk, S.

    ()

    (University of New South Wales)

  • Pavlov, O.V.

This paper investigates the effect of network structure on the asset price dynamics. We propose a simple present value discounted asset pricing model with heterogeneous agents. Every period the agents choose a predictor of the future price on the basis of past performance of their own and alternative strategies and form their demands for a risky asset. The information about the performance of an alternative strategy is available only locally from the directly connected agents. Using the rewiring procedure we produce four types of commonly considered networks: a fully connected network, a regular lattice, a small world, and a random network. The results show that the network structure influences asset price dynamics in terms of the region of stability and volatility. This is mostly due to the different speed of information transmission in the different networks.

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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 10-02.

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Date of creation: 2010
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Handle: RePEc:ams:ndfwpp:10-02
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. Shu-Heng Chen & Thomas Lux & Michele Marchesi, 1999. "Testing for Non-Linear Structure in an Artificial Financial Market," Discussion Paper Serie B 447, University of Bonn, Germany.
  2. Hommes, Cars & Huang, Hai & Wang, Duo, 2005. "A robust rational route to randomness in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 29(6), pages 1043-1072, June.
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  8. Hommes, C.H., 2001. "Modeling the stylized facts in finance through simple nonlinear adaptive systems," CeNDEF Working Papers 01-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  9. Mikhail Anufriev & Giulio Bottazzi, 2004. "Asset Pricing Model with Heterogeneous Investment Horizons," LEM Papers Series 2004/22, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
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  11. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  12. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  13. Ehrentreich, Norman, 2006. "Technical trading in the Santa Fe Institute Artificial Stock Market revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 599-616, December.
  14. Bottazzi, Giulio & Dosi, Giovanni & Rebesco, Igor, 2005. "Institutional architectures and behavioral ecologies in the dynamics of financial markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 197-228, February.
  15. Piergiuseppe Morone & Richard Taylor, 2004. "Knowledge diffusion dynamics and network properties of face-to-face interactions," Journal of Evolutionary Economics, Springer, vol. 14(3), pages 327-351, 07.
  16. Chen, Shu-Heng & Yeh, Chia-Hsuan, 2001. "Evolving traders and the business school with genetic programming: A new architecture of the agent-based artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 25(3-4), pages 363-393, March.
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