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. Warwick Business School, Financial Econometrics Research Centre, Coventry.
WRAP_diks_fwp07-06.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
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|
|Number of Pages:||40|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|References:||Barsky, R. B. and De Long, J. B. (1993). Why does the stock market fluctuate? Quarterly Journal of Economics, 108, 291–311. Barucci, E., Monte, R. and Ren´o, R. (2004). Asset price anomalies under bounded rationality. Computational Economics, 23, 255–269. Binmore, K. and Samuelson, L. (1997). Muddling through: Noisy equilibrium selection. Journal of Economic Theory, 74, 235–265. Boswijk, H. P., Hommes, C. H. and Manzan, S. (2007). Behavioral heterogeneity in stock prices. Technical Report. CeNDEFWorking paper 05-12, University of Amsterdam. Journal of Economic Dynamics and Control, forthcoming. Bray, M. (1982). Learning, estimation, and the stability of rational expectations. Journal of Economic Theory, 26, 318–339. Brock, W. A. and Hommes, C. H. (1997). Rational routes to randomness. Econometrica, 65, 1059–1095. 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, 22, 451–481. Bulkley, G. and Tonks, J. (1989). Are U.K. stock prices excessively volatile? Trading rules and variance bound tests. Economic Journal, 99, 1083–1098. Chiarella, C. (1992). The dynamics of speculative behavior. Annals of Operations Research, 37, 101–123. Dindo, P. (2007). Bounded Rationality and Heterogeneity in Economic Dynamic Models. Ph.D. Thesis, Tinbergen Institute and University of Amsterdam,. Droste, E., Hommes, C. and Tuinstra, J. (2002). Endogenous fluctuations under evolutionary pressure in Cournot competition. Games and Economic Behavior, 40, 232–269. Fama, E. F. and French, K. R. (1988a). Dividend yields and expected stock returns. Journal of Financial Economics, 22, 3–25. Fama, E. F. and French, K. R. (1988b). Permanent and temporary components of stock prices. Journal of Political Economy, 96, 246–273. Gallagher, L. A. and Taylor, M. P. (2001). Risky arbitrage, limits of arbitrage, and nonlinear adjustment in the dividend-price ratio. Economic Inquiry, 39, 524–536. Goldbaum, D. (2005). Market efficiency and learning in an endogenously unstable environment. Journal of Economic Dynamics and Control, 29, 953–978. Gordon, M. J. (1962). The Investment, Financing, and Valuation of the Corporation. R. D. Irwin, Inc., Homewood, IL. Grossman, S. J. and Stiglitz, J. E. (1980). On the impossibility of informationally efficient markets. American Economic Review, 70, 393–408. Hellwig, M. F. (1982). Rational expectations with conditioning on past prices: A mean-variance example. Journal of Economic Theory, 26, 279–312. Hommes, C.H. (2006). Heterogeneous agents models in economics and finance. In Handbook of Computational Economics (eds L. Tesfatsion and K. L. Judd), volume 2, chapter 23, pp. 1109 – 1186. Elsevier, North Holland. Hong, H. and Stein, J. C. (1999). A unified theory of underreaction, momentum trading and overreaction in asset markets. Journal of Finance, 54, 2143–2184. LeBaron, B. (2006). Agent based computational finance. In Handbook of Computational Economics (eds L. Tesfatsion and K. L. Judd), volume 2, chapter 24, pp. 1187–1234. Elsevier, North Holland. LeRoy, S. F. and Porter, R. D. (1981). The present-value relation: Tests based on implied variance bounds. Econometrica, 49, 555–574. Manzan, S. (2003). Nonlinear mean reversion in stock prices. Technical Report. CeNDEF Working paper 03-02, University of Amsterdam. Manzan, S. andWesterhoff, F. (2005). Representativeness of news and exchange rate dynamics. Journal of Economic Dynamics and Control, 29, 677–689. Poterba, J. M. and Summers, L. H. (1988). Mean reversion in stock prices. Journal of Financial Economics, 22, 27–59. Routledge, B. R. (1999). Adaptive learning in financial markets. Review of Financial Studies, 12, 1165–1202. Shiller, R. J. (1981). Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review, 71, 421–436. Shiller, R. J. (1984). Stock prices and social dynamics. Brookings Papers on Economic Activity, 2, 457–510. Summers, L. H. (1986). Does the stock market rationally reflect fundamental values? Journal of Finance, 41, 591–602. Timmermann, A. (1993). How learning in financial markets generates excess volatility and predictability of excess returns. Quarterly Journal of Economics, 108, 1135–1145. Timmermann, A. (1996). Excess volatility and predictability of stock prices in autoregressive dividend models with learning. Review of Economics Studies, 63, 523–557. Weibull, J.W. (1995). Evolutionary Game Theory. MIT Press, Cambridge, MA. Young, H. P. and Foster, D. (1991). Cooperation in the short and in the long-run. Games and Economic Behavior, 3, 145–156.|
Actions (login required)