An Asset Pricing Model with Adaptive Heterogeneous Agents and Wealth Effects

Carl Chiarella and Xuezhong (Tony) He ()

A chapter in Nonlinear Dynamics and Heterogeneous Interacting Agents, 2005, pp 269-285 from Springer

Abstract: Summary The characterisation of agents' preferences by decreasing absolute risk aversion (DARA) and constant relative risk aversion (CRRA) are well documented in the literature and also supported in both empirical and experimental studies. This paper considers a financial market with heterogeneous agents having power utility functions, which are the only utility functions displaying both DARA and CRRA. By introducing a population weighted average wealth measure, we develop an adaptive model to characterise asset price dynamics as well as the evolution of population proportions and wealth dynamics. Some numerical simulations are included to illustrate the evolution of the wealth dynamics, market behaviour and market efficiency within the framework of heterogeneous agents.

Keywords: Asset Price; Trading Strategy; Risky Asset; Asset Price Model; Dividend Yield (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-540-27296-0_18

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DOI: 10.1007/3-540-27296-8_18

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