Price dynamics in a market with heterogeneous investment horizons and boundedly rational traders

Th. Chauveau and A. Subbotin

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 5, 1040-1065

Abstract: This paper studies the effects of multiple investment horizons and investors' bounded rationality on the price dynamics. We consider a market with one risky asset with agents maximizing expected utility of wealth over discrete investment periods. Investors' demand for the risky asset may depend on the historical returns, so that our model encompasses a wide range of behaviorist patterns. Stochastic properties of the returns process are established analytically and illustrated by simulation. The links between dynamic patterns in returns and different types of investment behavior are explored in the heterogeneous agents' framework. We find that conditional volatility of returns cannot be constant in many generic situations, especially if agents with different investment horizons operate on the market. In the latter case, the return process can display conditional heteroscedasticity, even if all investors are so-called “fundamentalists” and their demand for the risky asset is subject to exogenous iid shocks. We show that the heterogeneity of investment horizons can contribute to the explanation of different stylized patterns in stock returns, in particular, mean-reversion and volatility clustering.

Keywords: Asset pricing; Heterogeneous agents; Multiple investment scales; Volatility clustering (search for similar items in EconPapers)
JEL-codes: D84 G11 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:5:p:1040-1065

DOI: 10.1016/j.jedc.2013.01.011

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