Asset price in an overlapping generations model with case-based decision makers with short memory

Ani Guerdjikova

No 04-44, Papers from Sonderforschungsbreich 504

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.

Keywords: Case-Based Decision Theory; financial markets; asset pricing (search for similar items in EconPapers)
JEL-codes: D81 G12 (search for similar items in EconPapers)
Date: 2004
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