Asset Return Dynamics under Alternative Learning Schemes

Elena Catanese, Andrea Consiglio, Valerio Lacagnina and Annalisa Russino ()
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Elena Catanese: University of Palermo
Andrea Consiglio: University of Palermo
Valerio Lacagnina: University of Palermo
Annalisa Russino: University of Palermo

Chapter Chapter 17 in Artificial Economics, 2009, pp 211-222 from Springer

Abstract: Abstract In this paper we design an artificial financial market where endogenous volatility is created assigning to the agents diverse prior beliefs about the joint distribution of returns, and, over time, making agents rationally update their beliefs using common public information. We analyze the asset price dynamics generated under two learning environments: one where agents assume that the joint distribution of returns is IID, and another where agents believe in the existence of regimes in the joint distribution of asset returns. We show that the regime switching learning structure can generate all the most common stylized facts of financial markets: fat tails and long-range dependence in volatility coexisting with relatively efficient markets.

Keywords: Asset Return; Return Distribution; Asset Allocation; Regime Switching; Investment Horizon (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-642-02956-1_17

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DOI: 10.1007/978-3-642-02956-1_17

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