TY - CHAP
T1 - Heterogeneity, Market Mechanisms, and Asset Price Dynamics
AU - Chiarella, Carl
AU - Dieci, Roberto
AU - He, Xue Zhong
N1 - Funding Information:
Note: The authors are thankful to participants of Modelli Dinamici in Economia e Finanza (MDEF) 2006 at the University of Urbino for comments on an earlier draft of this work. The authors would also like to thank the anonymous reviewers and the editors for many insightful comments that have helped to greatly improve this chapter. Chiarella and He acknowledge support from the ARC under Discovery Grant Project DP0450526. Dieci acknowledges support from MIUR under the project PRIN-2004137559, “Nonlinear models in economics and finance: interactions, complexity and forecasting.”
PY - 2009
Y1 - 2009
N2 - Although there might be agreement that the standard paradigm does not fully explain what is causing the evolution of speculative asset prices, there may be less agreement on where to start to build an improved paradigm. By and large, the view that has been adopted in the boundedly rational heterogeneous agent literature is to retain expected utility maximization as the goal of each agent but to allow the agents to have different risk preferences and different expectations, rather than the single homogeneous rational expectation, about future possible returns. The expectations differ since agents are assumed to have different information and beliefs. Thus the asset price modeling framework is based on the fact that trading is driven more by differences in expectations than by the random arrival of news events. Within this framework, a simple market of one risky asset and one risk-free asset, with agents having different expectations, is considered with two different types of utility functions and two different market-clearing mechanisms. The framework provides the basic elements and structure of the various models. The basic building blocks of this framework are portfolio optimization, agents' utility functions, the market-clearing mechanism, and expectations feedback.
AB - Although there might be agreement that the standard paradigm does not fully explain what is causing the evolution of speculative asset prices, there may be less agreement on where to start to build an improved paradigm. By and large, the view that has been adopted in the boundedly rational heterogeneous agent literature is to retain expected utility maximization as the goal of each agent but to allow the agents to have different risk preferences and different expectations, rather than the single homogeneous rational expectation, about future possible returns. The expectations differ since agents are assumed to have different information and beliefs. Thus the asset price modeling framework is based on the fact that trading is driven more by differences in expectations than by the random arrival of news events. Within this framework, a simple market of one risky asset and one risk-free asset, with agents having different expectations, is considered with two different types of utility functions and two different market-clearing mechanisms. The framework provides the basic elements and structure of the various models. The basic building blocks of this framework are portfolio optimization, agents' utility functions, the market-clearing mechanism, and expectations feedback.
UR - http://www.scopus.com/inward/record.url?scp=84882500517&partnerID=8YFLogxK
U2 - 10.1016/B978-012374258-2.50009-9
DO - 10.1016/B978-012374258-2.50009-9
M3 - Chapter
AN - SCOPUS:84882500517
SN - 9780123742582
SP - 277
EP - 344
BT - Handbook of Financial Markets
PB - Elsevier Inc.
ER -