Asset price dynamics when behavioural heterogeneity varies

Domenico Colucci and Vincenzo Valori

No 2006-01, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: We build a model in which asset prices are expectationally driven and agents forecast future prices hinging on a combination of fundamental value, trend and inertia. The model has a unique steady state and we investigate its stability. In particular the amount of behavioural heterogeneity in the model is given by the number of intermediaries actually operating in the market: we are concerned with the effects that changing such number produces on the steady state in terms of stability. Assuming that the set of relevant intermediaries is sampled randomly we discuss the probability of having stability as a function of the market's parameters and the number of such agents. Our simulations show that stability in the multi-agent setting does not require that conditions for stability in the representative agent case be met for every individual; so stability can arise even if some of the agents would not be compatible with it if they were the only ones operating in the market. The same goes for instability. Further, we find that stabilising (or destabilising) effects of heterogeneity are not uniform across the market's essential characteristics, as captured by a given structural parameter: in fact we can identify a parametric region in which heterogeneity is stabilising and another in which it is destabilising.

Keywords: heterogeneous agents; expectations; stock market; behavioural finance; bounded rationality; middlemen. (search for similar items in EconPapers)
JEL-codes: D84 G12 (search for similar items in EconPapers)
Pages: 31
Date: 2006-11
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Published as Domenico Colucci and Vincenzo Valori, 2008. "Asset Price Dynamics When Behavioural Heterogeneity Varies," Computational Economics, Springer, vol. 32(1), pages 3-20.

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Journal Article: Asset Price Dynamics When Behavioural Heterogeneity Varies (2008)
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