Fading Memory Learning in the Cobweb Model with Risk Averse Heterogeneous Producers

Carl Chiarella, Xuezhong (Tony) He () and Peiyuan Zhu

No 108, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper studies the dynamics of the traditional cobweb model with risk averse heterogeneous producers who seek to learn the distribution of asset prices using a geometric decay processes (GDP) - the expected mean and variance are estimated as a geometric weighted average of past observations - with either finite or infinite fading memory. With constant absolute risk aversion, the dynamics of the model can be characterized with respect to the length of memory window and the memory decay rate of the learning GPD. The dynamics of such heterogeneous learning processes and capability of producers' learning are discussed. It is found that the learning memory decay rate of the GDP of heterogeneous producers plays a complicated role on the pricing dynamics of the nonlinear cobweb model. In general, an increase of the memory decay rate plays stabilizing role on the local stability of the steady state price when the memory is infinite, but this role becomes less clear when the memory is finite. It shows a double edged effect of the heterogeneity on the dynamics. It is shown that (quasi)periodic solutions and strange (or even chaotic) attractors can be created through Neimark-Hopf bifurcation when the memory is infinite and through flip bifucation as well when the memory is finite.

Keywords: cobweb model; heterogeneity; bounded rationality; geometric decay learning dynamics; bifurcations (search for similar items in EconPapers)
JEL-codes: C60 D83 D84 E21 E32 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2003-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Working Paper: Fading Memory Learning in the Cobweb Model with Risk Averse Heterogeneous Producers (2003)
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