Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework

Carl Chiarella, Roberto Dieci and Xuezhong (Tony) He ()
Additional contact information
Roberto Dieci: Dipartimento di Matematica per le Scienze Economiche e Sociali, University of Bologna

No 166, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Following the framework of a one risky - one riskless asset model developed by Brock and Hommes (1998), this paper considers a discrete-time model of a financial market where heterogeneous groups of agents allocate their wealth amongst multiple risky assets and a riskless asset. Agents follow different expectation formation schemes for both first and second moments of the distribution of returns. Instead of using a Walrasian auctioneer scenario as the market clearing mechanism, a market maker scenario is used. In particular, the paper focuses on the case of two risky assets and two agent types, fundamentalists and trend chasers. Conditions for the stability of the “fundamental” equilibrium are established in terms of the key parameters, in particular the extrapolation rate of the trend chasers and the weight of the two groups in the market. Numerical explorations are performed in order to analyze the combined effect of the interaction between heterogeneous traders and the diversification among multiple risky assets. Particular attention is paid to the effect of the correlation between the risky assets. It turns out that investors’ anticipated correlation and portfolio diversification do not always have a stabilizing role, but rather may act as a further source of complexity in the financial market.

Keywords: heterogeneous beliefs; asset pricing; portfolio choice; bifurcation analysis; comovements in stock prices (search for similar items in EconPapers)
JEL-codes: C61 D84 G11 G12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2005-09-01
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as: Chiarella, C., Dieci, R. and He, X., 2007, "Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework", Journal of Economic Behavior and Organization, 62(3), 408-427.

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https://www.uts.edu.au/sites/default/files/qfr-archive-02/QFR-rp166.pdf (application/pdf)

Related works:
Journal Article: Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework (2007)
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