Asset Prices in an Overlapping Generations Model with Case-Based Decision Makers with Short Memory

Ani Guerdjikova ()
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Ani Guerdjikova: Cornell University, Postal: Uris Hall 462, Ithaca, NY 14853

No 04-44, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: I consider an economy, populated by case-based decision makers with one-period memory. Consumption can be transferred between the periods by the means of a riskless storage technology or a risky asset with iid dividend payments. I analyze the dynamics of asset holdings and asset prices. Whereas an economy in which the investors have low aspiration levels exhibits constant prices and asset holdings, investors with high aspiration levels create cycles, which may be stochastic or deterministic. Arbitrage possibilities, deviation of the price from the fundamental value, predictability of returns and excessive volatility are shown to obtain in a market with case-based investors.

Pages: 32 pages
Date: 2004-11-24
New Economics Papers: this item is included in nep-fin and nep-rmg
Note: I am indebted to my advisor Juergen Eichberger for his helpful guidance.
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