Asset Price and Wealth Dynamics under Heterogeneous Expectations

Xuezhong (Tony) He and Carl Chiarella

No 5A.2, CeNDEF Workshop Papers, January 2001 from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: In order to characterise price and wealth dynamics under the interaction of heterogeneous agents with a CRRA utility, a discrete time stationary wealth dynamics model in terms of return and wealth proportions (among different types of agents) is established. Fundamentalists and chartists are the main heterogeneous agents in the model. It is found that the presence of heterogeneous agents can lead the stationary model to have multiple equilibria. The equilibrium is unstable when the chartist extrapolation rate is high and (locally) stable when the rate is low. The convergence to the equilibrium follows an optimal selection principle --- the return and wealth proportion tends to one of the equilibria, which has relative higher return. The model that is finally developed displays the essential characteristics of the standard asset price dynamics model assumed in continuous time finance in that the asset price is fluctuating around an geometrically growing trend.

Date: 2001-01-04
New Economics Papers: this item is included in nep-fin and nep-fmk
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Journal Article: Asset price and wealth dynamics under heterogeneous expectations (2001)
Working Paper: Asset Price and Wealth Dynamics Under Heterogeneous Expectations (2001)
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