How helpful is a long memory on financial markets?

Sandra GØth () and Sven Ludwig ()
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Sandra GØth: Department of Economics, University of Bielefeld, P.O. Box 100 131, 33501 Bielefeld, GERMANY
Sven Ludwig: Department of Economics, University of Bielefeld, P.O. Box 100 131, 33501 Bielefeld, GERMANY

Economic Theory, 2000, vol. 16, issue 1, 107-134

Abstract: How should portfolio decisions depend on the past? In a simple model with boundedly rational agents we show that there is no universal answer to this question. Both, long and short memory, can be optimal in the appropriate environment. In most cases there is an equilibrium where both dispositions are equally successful. We characterize such equilibria for the case of two assets and two states. For dynamics based on average payoff, equilibria are global attractors whereas discrete choice dynamics in general do not converge to the equilibrium.

Keywords: Financial markets; Limited memory; Bounded rationality; Discrete choice. (search for similar items in EconPapers)
JEL-codes: D89 G11 (search for similar items in EconPapers)
Date: 2000-04-14
Note: Received: August 31, 1998; revised version: November 15, 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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