Brock, William A., Hommes, Carsien Harm and Wagener, Florian O. O. (2006) More hedging instruments may destabilize markets. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

This paper formalizes the idea that more hedging instruments may destabilize markets when traders are heterogeneous and adapt their behavior according to experience based reinforcement learning. We investigate three different economic settings, a simple mean-variance asset pricing model, a general equilibrium two-period overlapping generations model with heterogeneous expectations and a noisy rational expectations asset pricing model with heterogeneous information signals. In each setting the introduction of additional Arrow securities can destabilize the market, causing a bifurcation of the steady state to multiple steady states, periodic orbits or even chaotic fluctuations.

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), Pricing -- Mathematical models, Nonlinear pricing, Bifurcation theory
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	September 2006
Number:	No.06-
Number of Pages:	72
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Nederlandse Organisatie voor Wetenschappelijk Onderzoek [Netherlands Organisation for Scientific Research] (NWO), National Science Foundation (U.S.) (NSF), Vilas Trust (VT), Seventh Framework Programme (European Commission) (FP7/2007-2013)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1757

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