Asset Prices in an Overlapping Generations Model with Case-Based Decision Makers with Short Memory
I consider an economy, populated by case-based decision makers with one-period memory. Consumption can be transferred between the periods by the means of a riskless storage technology or a risky asset with iid dividend payments. I analyze the dynamics of asset holdings and asset prices. Whereas an economy in which the investors have low aspiration levels exhibits constant prices and asset holdings, investors with high aspiration levels create cycles, which may be stochastic or deterministic. Arbitrage possibilities, deviation of the price from the fundamental value, predictability of returns and excessive volatility are shown to obtain in a market with case-based investors.
|Date of creation:||24 Nov 2004|
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|Note:||I am indebted to my advisor Juergen Eichberger for his helpful guidance.|
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- De Long, J Bradford, et al, 1990.
" Positive Feedback Investment Strategies and Destabilizing Rational Speculation,"
Journal of Finance,
American Finance Association, vol. 45(2), pages 379-95, June.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
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