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Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model

  • Xue-Zhong He

    ()

    (University of Technology, Sydney)

  • Carl Chiarella

    ()

    (University of Technology, Sydney)

Following the concept of "adaptively rational equilibrium", Brock and Hommes establish a simple present discounted value asset-pricing model with heterogeneous beliefs. Agents adapt their beliefs over time by choosing from different predictors or expectations functions, based upon their past performance as measured by realised profits. As the intensity of choice to switch predictors increases, they have observed several bifurcation routes to complicated asset-price fluctuations. In this paper we extend this model to incorporate different risk attitudes of different types of investors and allow for more sophisticated learning schemes. Using both bifurcation theory and numerical analysis, we investigate the effects on the dynamics of the model of different risk aversion coefficients and different learning schemes. We also systematically investigate the effect of external noise on the system. We find that the resulting dynamical behaviour is considerably enriched and has some significant differences compared to the original Brock-Hommes analysis.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 223.

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Date of creation: 01 Mar 1999
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Handle: RePEc:sce:scecf9:223
Contact details of provider: Postal: CEF99, Boston College, Department of Economics, Chestnut Hill MA 02467 USA
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Web page: http://fmwww.bc.edu/CEF99/

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  1. Campbell, John Y & Kyle, Albert S, 1993. "Smart Money, Noise Trading and Stock Price Behaviour," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 1-34, January.
  2. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  3. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  4. 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.
  5. James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
  6. Giulia Iori, 1999. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Finance 9905005, EconWPA.
  7. Day, R. & Huang, W., 1988. "Bulls, Bears And Market Sheep," Papers m8822, Southern California - Department of Economics.
  8. Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
  9. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
  10. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March.
  11. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  12. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March.
  13. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
  14. repec:att:wimass:9706 is not listed on IDEAS
  15. Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572141, June.
  16. Reiner Franke & Tim Nesemann, 1999. "Two destabilizing strategies may be jointly stabilizing," Journal of Economics, Springer, vol. 69(1), pages 1-18, February.
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