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Networks of Heterogeneous Expectations in an Asset Pricing Market

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  • Makarewicz, T.A.

    (University of Amsterdam)

Abstract

The paper studies the e ect of information networks on learning to forecast in an asset pricing market. Financial traders have heterogeneous price expectations, are influenced by friends and seem to be prone to herding. However, in laboratory experiments subjects use contrarian strategies. Theoretical literature on learning in networks is scarce and cannot explain this conundrum (Panchenko et al., 2013). The paper follows Anufriev et al. (2014) and investigates an agent-based model, in which agents forecast price with a simple general heuristic: adaptive and trend extrapolation expectations, with an additional term of (dis-)trust towards their friends' mood. Agents independently use Genetic Algorithms to optimize the parameters of the heuristic. The paper considers friendship networks of symmetric (regular lattice, fully connected) and asymmetric architecture (random, rewired, star). The main finding is that the agents learn contrarian strategies, which amplifies market turn-overs and hence price oscillations. Nevertheless, agents learn similar behavior and their forecasts remain well coordinated. The model therefore o ers a natural interpretation for the di erence between the experimental stylized facts and market surveys.

Suggested Citation

  • Makarewicz, T.A., 2015. "Networks of Heterogeneous Expectations in an Asset Pricing Market," CeNDEF Working Papers 15-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  • Handle: RePEc:ams:ndfwpp:15-08
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