Local Interaction, Incomplete Information and Properties of Asset Prices

Richard Hule () and Jochen Lawrenz ()
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Richard Hule: Innsbruck University
Jochen Lawrenz: Innsbruck University

Chapter 8 in Complexity and Artificial Markets, 2008, pp 91-105 from Springer

Abstract: Abstract In this article, we introduce local interaction in a pure exchange economy where the endowment process follows a simple hidden Markov chain and risk-averse agents have incomplete information about the regime. We show that the interplay between internal, external local and external global effects (a) can account for different temporal behavior of the price-dividend ratio, (b) can reproduce some stylized facts of price changes and (c) suggest that market efficiency in the sense of return predictability may be inversely related to the information precision.

Keywords: Asset Price; Incomplete Information; Risk Premium; Local Interaction; Risky Asset (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-540-70556-7_8

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DOI: 10.1007/978-3-540-70556-7_8

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