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Abstract
This paper develops a simple heterogeneous agent model (HAM) of asset prices with bounded rationality and adaptive behaviour. The model features feedback loop that amplifies shocks and leads to large price fluctuations. Our model not only retains the nonlinear interaction between prices and population in HAMs but also allows for a quantitative comparison with the data. Estimating the model to the data shows that the feedback loop helps explain the large variations in expected returns, such as return predictability and excess volatility.
Original language | English |
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Article number | 102037 |
Pages (from-to) | 1-14 |
Number of pages | 14 |
Journal | International Review of Financial Analysis |
Volume | 80 |
DOIs | |
Publication status | Published - Mar 2022 |
Keywords
- Bounded rationality
- Adaptive behaviour
- Feedback
- Regime switching
- Estimation
- Heterogeneity
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Dive into the research topics of 'Bounded rationality, adaptive behaviour, and asset prices'. Together they form a unique fingerprint.Projects
- 2 Finished
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Slow Diffusion of Information in Asset Pricing and Risk Management
1/01/18 → 31/12/20
Project: Research