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Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model

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Abstract

Trade among individuals occurs either because tastes (risk aversion) differ, endowments differ, or beliefs differ. Utilisating the concept of :adaptively rational equilibrium" and a recent framework of Brock and Hommes [6, 7], this paper incorporates risk and learning schemes into a simple discounted present value asset price model with heterogeneous beliefs. Agents have different risk aversion coefficients and adapt their beliefs (about future returns) over time by choosing from different predictors or expectations functions, based upon their past performance as measured by realized profits. By using both bifurcation theory and numerical analysis, it is found that the dynamics of asset pricing is affected by the relative risk attitudes of different types of investors. It is also found that the external noise and learning schemes can significantly affect the dynamics. Compared with the findings of Brock and Hommes [7] on the dynamics caused by chage of the intensity of choice to switch predictors, it is found that many of their insights are robust to the generalizations considered; however, the resulting dynamical behavior is considerably enriched and exhibits some significant differences.

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  • Carl Chiarella & Xue-Zhong He, 1999. "Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model," Research Paper Series 18, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:18
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    1. 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.
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    12. Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572141.
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    14. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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