Heterogeneous Beliefs and Adaptive Behaviour in a Continuous-Time Asset Price Model

Xuezhong (Tony) He and Kai Li

No 291, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper extends the analysis of the seminal paper of Brock and Hommes (1998) on heterogeneous beliefs and routes to chaos in a simple asset price model in discrete-time to a model in continuous-time. The resulting model characterized mathematically by a system of stochastic delay differential equations provides a unified approach to deal with adaptive behaviour of heterogeneous agents and stability impact of lagged price information used by chartists to form their expectations. For the underlyingd eterministic model, we show not only that the result of Brock and Hommes on rational routes to market instability in discrete-time holds in continuous time but also a double edged effect of an increase in lagged price information used by the chartists on market stability. For the stochastic model, we demonstrate that the model is able to display various market phenomena such as bubbles and crashes and replicate stylized facts including volatility clustering, and long range dependence in volatility.

Keywords: heterogeneous beliefs; bounded rationality; adaptiveness; fundamentalists; chartists; stability; stochastic delay differential equations (search for similar items in EconPapers)
JEL-codes: E32 G12 G14 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2011-06-01
References: Add references at CitEc
Citations:

Published as: He, X. and Li, K., 2012, "Heterogeneous Beliefs and Adaptive Behaviour in a Continuous-Time Asset Price Model", Journal of Economic Dynamics and Control, 36(7), 973-987.

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp291.pdf (application/pdf)

Related works:
Journal Article: Heterogeneous beliefs and adaptive behaviour in a continuous-time asset price model (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uts:rpaper:291

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().