An Evolutionary CAPM Under Heterogeneous Beliefs

Carl Chiarella, Roberto Dieci, Xuezhong (Tony) He and Kai Li
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Roberto Dieci: Department of Mathematics, University of Bologna

No 315, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: Heterogeneity and evolutionary behaviour of investors are two of the most important characteristics of financial markets. This papers incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within the mean-variance framework. We show that the rational behaviour of agents switching to better performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.

Keywords: evolutionary CAPM; heterogeneous beliefs; market stability; spill-over effects; volatility; trading volume (search for similar items in EconPapers)
JEL-codes: D84 G12 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2012-10-01
New Economics Papers: this item is included in nep-evo and nep-fmk
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Published as: Chiarella, C., Dieci, R., He, X. and Li, K., 2013, "An Evolutionary CAPM Under Heterogeneous Beliefs", Annals of Finance, 9(2), 185-215.

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https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp315.pdf (application/pdf)

Related works:
Journal Article: An evolutionary CAPM under heterogeneous beliefs (2013)
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