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Adaptive learning in the Cobweb with an endogenous gain sequence

Listed author(s):
  • Domenico Colucci

    ()

    (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)

  • Vincenzo Valori

    ()

    (Dipartimento di Matematica per le Decisioni - Università degli Studi di Firenze)

We develop a learning rule that generalises the well known fading memory learning in the sense that the weights attached to the available time series data are not constant and are updated in light of the forecast error(s). The underlying idea is that confidence in the available data will be low when large errors have been realized (e.g. in times of higher volatility) and vice versa. A class of functional forms compatible with this idea is analysed in the context of a standard Cobweb model with boundedly rational agents. We study the problem of convergence to the perfect foresight equilibrium and give conditions that ensure the coexistence of different attractors. We refer to experimental and numerical evidence to establish the possible range of application of the generalised fading memory learning.

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File URL: http://www.disei.unifi.it/upload/sub/pubblicazioni/repec/flo/workingpapers/storicodimad/2004/dimadwp2004-01.pdf
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Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Mathematical Economics with number 2004-01.

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Length: 17
Date of creation: Sep 2004
Publication status: Published in: Mathematics Magazine, 79/3, 201-206, 2006
Handle: RePEc:flo:wpaper:2004-01
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  1. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-124, March.
  2. Colucci, Domenico & Valori, Vincenzo, 2005. "Error learning behaviour and stability revisited," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 371-388, March.
  3. Albert Marcet & Juan P. Nicolini, 2003. "Recurrent Hyperinflations and Learning," American Economic Review, American Economic Association, vol. 93(5), pages 1476-1498, December.
  4. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07.
  5. Williams, Arlington W, 1987. "The Formation of Price Forecasts in Experimental Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 1-18, February.
  6. Schmalensee, Richard, 1976. "An Experimental Study of Expectation Formation," Econometrica, Econometric Society, vol. 44(1), pages 17-41, January.
  7. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages 401-426, October.
  8. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
  9. Barucci, Emilio, 2000. "Exponentially fading memory learning in forward-looking economic models," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 1027-1046, June.
  10. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
  11. Carl Chiarella & Xue-Zhong He & Peiyuan Zhu, 2003. "Fading Memory Learning in the Cobweb Model with Risk Averse Heterogeneous Producers," Research Paper Series 108, Quantitative Finance Research Centre, University of Technology, Sydney.
  12. Hugh Kelley & Daniel Friedman, 2002. "Learning to Forecast Price," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 556-573, October.
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