Asset Pricing with Heterogeneous Investment Horizons

Mikhail Anufriev and Giulio Bottazzi

Studies in Nonlinear Dynamics & Econometrics, 2012, vol. 16, issue 4, 38

Abstract: We consider an analytically tractable asset pricing model describing the trading activity in a stylized market with two assets. Traders are boundedly rational expected utility maximizers with different beliefs about future prices and different investment horizons. In particular, we analyze the effects of the latter source of heterogeneity on the dynamics of price. We find that in the case with homogeneous agents, longer investment horizons lead to more stable dynamics. This is not true, however, in the case of a mixed population of traders, when the increase of heterogeneity in the investment horizons can introduce instability in the system. Furthermore, the role of heterogeneity turns out to be different for different trading behaviors and its effect on the aggregate dynamics depends on the whole ecology of agents' beliefs.

Date: 2012
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DOI: 10.1515/1558-3708.1903

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