Verbic, Miroslav (2006): Memory and Asset Pricing Models with Heterogeneous Beliefs.

PDF
MPRA_paper_1261.pdf Download (1MB)  Preview 
Abstract
The paper discusses the role of memory in asset pricing models with heterogeneous beliefs. In particular, we were interested in how memory in the fitness measure affects stability of evolutionary adaptive systems and survival of technical trading. In order to obtain an insight into this matter two cases were analyzed; a twotype case of fundamentalists versus contrarians and a threetype case of fundamentalists versus opposite biases. It has been established that increasing memory strength has a stabilizing effect on dynamics, though it is not able to eliminate speculative traders’ shortrun profit seeking behaviour from the market. Furthermore, opposite biases do not seem to lead to chaotic dynamics, even when there are no costs for fundamentalists. Apparently some (strong) trend extrapolator beliefs are needed in order to trigger chaotic asset price fluctuations.
Item Type:  MPRA Paper 

Institution:  Universiteit van Amsterdam 
Original Title:  Memory and Asset Pricing Models with Heterogeneous Beliefs 
Language:  English 
Keywords:  asset pricing; biased beliefs; contrarians; fitness measure; fundamentalists; heterogeneous beliefs; memory strength; stability 
Subjects:  G  Financial Economics > G1  General Financial Markets > G12  Asset Pricing ; Trading Volume ; Bond Interest Rates E  Macroeconomics and Monetary Economics > E3  Prices, Business Fluctuations, and Cycles > E32  Business Fluctuations ; Cycles C  Mathematical and Quantitative Methods > C0  General > C02  Mathematical Methods C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62  Existence and Stability Conditions of Equilibrium C  Mathematical and Quantitative Methods > C6  Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61  Optimization Techniques ; Programming Models ; Dynamic Analysis 
Item ID:  1261 
Depositing User:  Miroslav Verbic 
Date Deposited:  28. Dec 2006 
Last Modified:  24. Feb 2015 06:23 
References:  Arrowsmith, D. K. and Place, C. M., (1994) An Introduction to Dynamical Systems, Cambridge University Press, Cambridge, UK. Beja, A. and Goldman, M. B., (1980) On the Dynamic Behaviour of Prices in Disequilibrium, Journal of Finance Vol. 35, 235248. Brock, W. A., (1993) Pathways to Randomness in the Economy: Emergent Nonlinearity and Chaos in Economics and Finance, Estudios Económicos Vol. 8, 355. Brock, W. A. and Hommes, C. H., (1997a) A Rational Route to Randomness, Econometrica Vol. 65, 10591095. Brock, W. A. and Hommes, C. H., (1997b) Models of Complexity in Economics and Finance, System Dynamics in Economic and Financial Models, edited by C. Heij, J. M. Schumacher, B. Hanzon and C. Praagman, John Wiley & Sons, New York, NY. Brock, W. A. and Hommes, C. H., (1998) Heterogeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model, Journal of Economic Dynamics and Control Vol. 22, 12351274. Brock, W. A. and Hommes, C. H., (2001) Heterogeneous Beliefs and Routes to Complex Dynamics in Asset Pricing Models with Price Contingent Contracts, Equilibrium, Markets and Dynamics: Essays in Honour of Claus Weddepohl, edited by C. H. Hommes, R. Ramer and C. A. Withagen, SpringerVerlag, Berlin. Brock, W. A., Hommes, C. H. and Wagener, F. O. O., (2005) Evolutionary Dynamics in Markets with Many Trader Types, Journal of Mathematical Economics Vol. 41, 7 42. Campbell, J. Y., Lo, A. W. and MacKinlay, A. C., (1997) The Econometrics of Financial Markets, Princeton University Press, Princeton, NJ. Chiarella, C. and He, X.Z., (2002) Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model, Computational Economics Vol. 19, 95132. Chiarella, C., He, X.Z. and Zhu, P., (2003) Fading Memory Learning in the Cobweb Model with Risk Averse Heterogeneous Producers, Research Paper Series No. 108, Quantitative Finance Research Centre, University of Technology, Sydney. Chiarella, C., He, X.Z. and Hommes, C. H., (2006) A Dynamic Analysis of Moving Average Rules, Journal of Economic Dynamics and Control Vol. 30, 17291753. Cuthbertson, K., (1996) Quantitative Financial Economics: Stocks, Bonds and Foreign Exchange, John Wiley & Sons, Chichester, UK. De Grauwe, P. and Grimaldi, M., (2006) Exchange Rate Puzzles: A Tale of Switching Attractors, European Economic Review Vol. 50, 133. Eckmann, J.P. and Ruelle, D., (1985) Ergodic Theory of Chaos and Strange Attractors, Review of Modern Physics Vol. 57, 617656. Evans, G. W. and Honkapohja, S., (2001) Learning and Expectations in Macroeconomics, Princeton University Press, Princeton, NJ. Fama, E. F., (1991) Efficient Capital Markets: II, Journal of Finance Vol. 46, No. 5, 15751617. Frøyland, J., (1992) Introduction to Chaos and Coherence, Institute of Physics Publishing, Bristol, UK. Gaunersdorfer, A., (2000) Endogenous Fluctuations in a Simple Asset Pricing Model with Heterogeneous Agents, Journal of Economic Dynamics & Control Vol. 24, 799831. Gaunersdorfer, A., Hommes, C. H. and Wagener, F. O. O., (2003) Bifurcation Routes to Volatility Clustering under Evolutionary Learning, CeNDEF Working Paper No. 0303, University of Amsterdam, Amsterdam. Guckenheimer, J. and Holmes, P., (1983) Nonlinear Oscillations, Dynamical Systems, and Bifurcations of Vector Fields, SpringerVerlag, New York, NY. Hommes, C. H., (1991) Chaotic Dynamics in Economic Models: Some Simple Case Studies, WoltersNoordhoff, Groningen. Hommes, C. H. and Sorger, G., (1998) Consistent Expectations Equilibria, Macroeconomic Dynamics Vol. 2, 287321. Hommes, C. H., Sonnemans, J., Tuinstra, J. and van de Velden, H., (2002) Expectations and Bubbles in Asset Pricing Experiments, CeNDEF Working Paper No. 0205, University of Amsterdam, Amsterdam. Hommes, C. H., (2004) Syllabus Nonlinear Economic Dynamics, Afdeling Kwantitatieve Economie, Faculteit der Economische Wetenschappen en Econometrie, Universiteit van Amsterdam, Amsterdam. Hommes, C. H., Huang, H. and Wang, D., (2005) A Robust Rational Route to Randomness in a Simple Asset Pricing Model, Journal of Economic Dynamics & Control Vol. 29, 10431072. Hommes, C. H., (2006) Heterogeneous Agent Models in Economics and Finance, Handbook of Computational Economics, Volume 2: AgentBased Computational Economics, edited by L. Tesfatsion and K. L. Judd, Elsevier Science, Amsterdam. Honkapohja, S. and Mitra, K., (2003) Learning with Bounded Memory in Stochastic Models, Journal of Economic Dynamics & Control Vol. 27, 14371457. Johnson, N. F., Jefferies, P. and Hui, P. M., (2003) Financial Market Complexity: What Physics Can Tell Us about Market Behaviour, Oxford University Press, Oxford, UK. Kuznetsov, Y. A., (1995) Elements of Applied Bifurcation Theory, SpringerVerlag, New York, NY. LeBaron, B., (2000) Agent Based Computational Finance: Suggested Readings and Early Research, Journal of Economic Dynamics and Control Vol. 24, 679702. LeBaron, B., (2002) Shortmemory Traders and Their Impact on Group Learning in Financial Markets, Proceedings of the National Academy of Sciences (USA), Vol. 99, Suppl. 3, May 14, 72017206. LeBaron, B., (2006) Agentbased Computational Finance, Handbook of Computational Economics, Volume 2: AgentBased Computational Economics, edited by L. Tesfatsion and K. L. Judd, Elsevier Science, Amsterdam. Lucas, R. E., (1978) Asset Prices in an Exchange Economy, Econometrica Vol. 46, 14261446. Palis, J. and Takens, F., (1993) Hyperbolicity and Sensitive Chaotic Dynamics at Homoclinic Bifurcations: Fractal Dimensions and Infinitely Many Attractors in Dynamics, Cambridge University Press, Cambridge, UK. Sargent, T. J., (1993) Bounded Rationality in Macroeconomics, Oxford University Press, New York, NY. Shone, R., (1997) Economic Dynamics: Phase Diagrams and their Economic Application, Cambridge University Press, Cambridge, UK. Thaler, R. H., (1994) Quasi Rational Economics, Rusell Sage Foundation Publications, New York, NY. Verbič, M., (2006) On the Role of Memory in Asset Pricing Models with Heterogeneous Beliefs, Aenorm Vol. 13, No. 52, 1418. 
URI:  http://mpra.ub.unimuenchen.de/id/eprint/1261 