Adaptive beliefs and the volatility of asset prices

Adaptive beliefs and the volatility of asset prices

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Article ID: iaor2006700
Country: Germany
Volume: 9
Issue: 1/2
Start Page Number: 5
End Page Number: 30
Publication Date: Jul 2001
Journal: Central European Journal of Operations Research
Authors:
Keywords: stock market
Abstract:

I present a simple model of an evolutionary financial market with heterogeneous agents, based on the concept of adaptive belief systems introduced by Brock and Hommes. Agents choose between different forecast rules based on past performance, resulting in an evolutionary dynamics across predictor choice coupled to the equilibrium dynamics. The model generates endogenous price fluctuations with similar statistical properties as those observed in real return data, such as fat tails and volatility clustering. These similarities are demonstrated for data from the British, German, and Austrian stock markets.

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