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Endogenous fluctuations in a simple asset pricing model with heterogeneous agents

✍ Scribed by Andrea Gaunersdorfer

Publisher: Elsevier Science
Year: 2000
Tongue: English
Weight: 461 KB
Volume: 24
Category: Article
ISSN: 0165-1889
DOI: 10.1016/s0165-1889(99)00026-3

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✦ Synopsis

In this paper we study the adaptive rational equilibrium dynamics in a simple asset pricing model introduced by Brock and Hommes (System Dynamics in Economic and Financial Models, Wiley, Chichester, 1997, pp. 3}44; Journal of Economic Dynamics and Control, 22, 1998, 1235}1274). Traders have heterogeneous expectations concerning future prices and update their beliefs according to a risk adjusted performance measure and to market conditions. Further, also their expectations about conditional variances of returns vary over time. We show that even for the simple case where agents can only choose between two di!erent predictors complicated dynamics arise and we analyse the bifurcation routes to chaos.

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