Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework

This paper develops a dynamic model of a financial market where heterogeneous agents invest among multiple risky assets and a risk-free asset, under a market maker scenario. Particular attention is paid to the case of two risky assets and two agent types, fundamentalists and trend chasers, whose bel...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2007-03, Vol.62 (3), p.408-427
Main Authors: Chiarella, Carl, Dieci, Roberto, He, Xue-Zhong
Format: Article
Language:English
Subjects:
Asset pricing
Asset valuation
Assets
Beliefs
Bifurcation analysis
Co-movements in stock prices
Expectation
Heterogeneous beliefs
Portfolio choice
Portfolio selection
Risk management
Securities markets
Stock prices
Stock returns
Studies
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Summary:This paper develops a dynamic model of a financial market where heterogeneous agents invest among multiple risky assets and a risk-free asset, under a market maker scenario. Particular attention is paid to the case of two risky assets and two agent types, fundamentalists and trend chasers, whose beliefs on both first and second moments of the conditional distribution of returns are based on past observations. Conditions for the stability of the “fundamental” equilibrium are established and the effect of the correlation between the risky assets is examined. It turns out that investors’ anticipated correlation and dynamic portfolio diversification do not always have a stabilizing role, but rather may act as a source of complexity in the financial market.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2005.08.005