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Heterogeneous Expectations, Dynamics, and Stability of Markets

Author

Listed:
  • Laurence Lasselle

    (University of Saint Andrews)

  • Serge Svizzero

    (CERESUR - Centre d'Etudes et de Recherches Economique et Sociales de l'Université de La Réunion - UR - Université de La Réunion)

  • Clement Allan Tisdell

    (UQ [All campuses : Brisbane, Dutton Park Gatton, Herston, St Lucia and other locations] - The University of Queensland)

Abstract

This paper examines the role of heterogeneous beliefs in a cobweb model. For that purpose, we study the price dynamics resulting from the interaction of agents whose price expectations differ. We proceed in two stages. First, two groups of agents are distinguished. They are either fundamentalists, or chartists. The latter specify the expected price from an adaptive process, the former consider the expected price as the steady state price, they then display "rational behaviour". Second, we enrich the model by allowing that agents may choose between rational expectations and a simple adaptive process. Our work shows how market stability alters as the proportion of fundamentalists relative to chartists varies. We demonstrate two propositions. The market behaviour of fundamentalists compared to chartists promotes market stability. The existence of market stability depends on the specification of the expectations and the intensity of switching between the two behaviours. JEL Classification: C62, D84, E30.

Suggested Citation

  • Laurence Lasselle & Serge Svizzero & Clement Allan Tisdell, 2003. "Heterogeneous Expectations, Dynamics, and Stability of Markets," Post-Print hal-02163226, HAL.
    • Handle: RePEc:hal:journl:hal-02163226
    Note: View the original document on HAL open archive server: https://hal.univ-reunion.fr/hal-02163226
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    References listed on IDEAS

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    1. Marc Nerlove, 1958. "Adaptive Expectations and Cobweb Phenomena," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(2), pages 227-240.
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    Cited by:

    1. Lasselle, Laurence & Svizzero, Serge & Tisdell, Clem, 2005. "Stability And Cycles In A Cobweb Model With Heterogeneous Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 9(5), pages 630-650, November.
    2. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186, Elsevier.
    3. Brandouy, O., 2005. "Stock markets as Minority Games: cognitive heterogeneity and equilibrium emergence," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 349(1), pages 302-328.

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    More about this item

    Keywords

    Cobweb model; switching behaviour; Flip bifurcation; Neimark-Sacker bifurcation; resonance;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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