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Continuous Beliefs Dynamics

Author

Listed:
  • Cees Diks

    (Faculty of Economics and Econometrics, University of Amsterdam)

  • Roy van der Weide

    (Faculty of Economics and Econometrics, University of Amsterdam)

Abstract

We propose a general framework for studying the evolution ofheterogeneous beliefs in a dynamic feedback setting. Beliefsdistributions are defined on a continuous space representingthe possible strategies agents can choose from. Agents base theirchoices on past performances. As new information becomesavailable strategies are re-evaluated and the beliefsdistribution is updated using a continuous choice model. Thisapproach gives rise to price dynamics in which the beliefsdistribution evolves together with realized prices. Thestatistical properties of the endogenous random pricefluctuations are fully determined by the model. The structure ofthe macroscopic model depends on the class of predictors and onthe performance measure used by the agents. Whenever a well-knowneconometric model is obtained, an economic interpretation of themodel parameters can be given, as is shown here for an ARCHmodel. The approach is illustrated with several examples andempirical applications.

Suggested Citation

  • Cees Diks & Roy van der Weide, 2003. "Continuous Beliefs Dynamics," Tinbergen Institute Discussion Papers 03-007/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20030007
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    Citations

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    Cited by:

    1. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
    2. Massaro, D., 2012. "Regime shifts: early warnings," CeNDEF Working Papers 12-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    3. Massaro, Domenico, 2013. "Heterogeneous expectations in monetary DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 680-692.
    4. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2003. "Nonlocal onset of instability in an asset pricing model with heterogeneous agents," CeNDEF Working Papers 03-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

    More about this item

    Keywords

    Expectation formation; Heterogeneity; Continuous beliefs;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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