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On the Role of Memory in an Asset Pricing Model with Heterogeneous Beliefs

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  • Miroslav Verbic

    (Institute for Economic Research, Ljubljana, Slovenia)

Abstract

The paper discusses the role of memory in an asset pricing model with heterogeneous beliefs. In particular, we were interested in how memory in the fitness measure affects the stability of evolutionary adaptive systems and the survival of technical trading. In order to obtain an insight into this matter, two cases were analyzed: a two-type case of fundamentalists versus contrarians and a three-type case of fundamentalists versus opposite biases. It has been established that increasing memory strength has a stabilizing effect on dynamics, though it is not able to eliminate speculative traders’ short-run profit-seeking behaviour from the market. Furthermore, opposite biases do not seem to lead to chaotic dynamics, even when there are no costs for fundamentalists. Apparently some (strong) trend extrapolator beliefs are needed in order to trigger chaotic asset price fluctuations.

Suggested Citation

  • Miroslav Verbic, 2008. "On the Role of Memory in an Asset Pricing Model with Heterogeneous Beliefs," Financial Theory and Practice, Institute of Public Finance, vol. 32(2), pages 195-229.
    • Handle: RePEc:ipf:finteo:v:32:y:2008:i:2:p:195-229
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    References listed on IDEAS

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    More about this item

    Keywords

    asset pricing; biased beliefs; contrarians; fitness measure; fundamentalists; heterogeneous beliefs; memory strength; stability;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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