Informational differences and learning in an asset market with boundedly rational agents
Diks, Cees and Dindo, Pietro (2007) Informational differences and learning in an asset market with boundedly rational agents. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.07-).
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In this paper we study the properties of an asset pricing model where boundedly rational agents respond to incoming news about economic fundamentals such as future dividends. Our aim is to characterize the resulting fluctuations of the market price around the timevarying underlying fundamental value. The starting point is an asset market in which agents can choose among two different degrees of information regarding future dividends. At the same time agents also try to learn the growth rate of the dividend generating process. Their interaction leads to prices that deviate perpetually from the fundamental value in the short run but stay close to it in the long run. In particular, prices exhibit time-varying nonlinear mean reversion, with parameters determined by the learning process.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School
|Library of Congress Subject Headings (LCSH):||Assets (Accounting), Information theory in economics, Price -- Mathematical models, Nonlinear theories, Rational expectations (Economic theory)|
|Series Name:||Working papers (Warwick Business School. Financial Econometrics Research Centre)|
|Publisher:||Warwick Business School, Financial Econometrics Research Centre|
|Place of Publication:||Coventry|
|Official Date:||March 2007|
|Number of Pages:||40|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Barsky, R. B. and De Long, J. B. (1993). Why does the stock market fluctuate? Quarterly Journal of Economics, 108, 291–311.
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