On the Stability of Equilibrium in the Market with Heterogeneous Investment Horizons

This study incorporates the difference in agents’ trading intervals into the heterogeneous agent model developed by Brock and Hommes (1998). We show that the effect of a longer investment horizon appears as either an increase or a decrease in the fraction of strategy adopted by long-term traders, depending on the values of the risk-free rate in the economy and the variance perceived by both types of traders. Specifically, when long-term traders are fundamentalists, we consider whether an increase in the intensity of choice to switch predictors can lead to market instability, which is the main result obtained by Brock and Hommes (1998). This is robust if the transaction cost borne by short-term traders is less than the training cost borne by longterm traders. Furthermore, when there is no transaction cost, to establish the stability of the fundamental steady state, the feasible short-term trend followers’ belief form becomes more restrictive if the ratio of variance in the long-term investment horizon to that in the short-term investment horizon is larger than the risk-free rate in the economy.