Open AccessComplex dynamics in equilibrium asset pricing models with boundedly rational, heterogeneous agents
Author(s) -
Beaumont Paul M.,
Guan Yuanying,
Kercheval Alec N.
Publication year - 2013
Publication title -
complexity
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.447
H-Index - 61
eISSN - 1099-0526
pISSN - 1076-2787
DOI - 10.1002/cplx.21477
Subject(s) - economics , asset (computer security) , simple (philosophy) , assertion , constant (computer programming) , mathematical economics , rational expectations , capital asset pricing model , chaotic , convergence (economics) , function (biology) , econometrics , computer science , microeconomics , evolutionary biology , biology , programming language , economic growth , philosophy , computer security , management , epistemology
We study a simple model based upon the Lucas framework where heterogeneous agents behave rationally in a fully intertemporal setting but do not know other investors' personal preferences, wealth or investment portfolios. As a consequence, agents initially do not know the equilibrium asset pricing function and must make guesses, which they update via adaptive learning with constant gain. We demonstrate that even in this simple environment the economy can, depending on parameters, exhibit either stable convergence to equilibrium, or chaotic dynamical behavior of asset prices and trading volume without converging to the rational expectations equilibrium of the Lucas model. This contradicts the assertion that the Lucas model is stable in the face of modest deviations from the strong assumptions required to compute the equilibrium. © 2013 Wiley Periodicals, Inc. Complexity 19: 38–55, 2014
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