Memory and Asset Pricing Models with Heterogeneous Beliefs

Miroslav Verbič

MPRA Paper from University Library of Munich, Germany

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 two-type case of fundamentalists versus contrarians and a three-type 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’ short-run 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.

Keywords: asset pricing; biased beliefs; contrarians; fitness measure; fundamentalists; heterogeneous beliefs; memory strength; stability (search for similar items in EconPapers)
JEL-codes: C02 C61 C62 E32 G12 (search for similar items in EconPapers)
Date: 2006-08-15
New Economics Papers: this item is included in nep-evo and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:1261

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