Asset Price Anomalies Under Bounded Rationality
University of Pisa - Department of Economics
University of Rome Tor Vergata - Dipartimento di Studi Economici, Finanziari e Metodi quantitativi (SEFEMEQ)
University of Siena - Department of Economics and Statistics
CEIS Tor Vergata Research Paper Series No. 19
We analyze the classical asset pricing model assuming non fully rational agents. Agents forecast future prices cum dividend through an adaptive learning rule. This assumption provides an explanation of some anomalies encountered in the empirical analysis of asset prices under full rationality: Returns are serially correlated (positively over a short horizon and negatively over a longer horizon) and the dividend yield predicts future returns (positive correlation). Considering the continuous time limit process, the same regularities are established analytically for price increments.
Number of Pages in PDF File: 22
Keywords: Asset Prices, Returns correlation, Bounded Rationality, Dividends, Diffusion Processes
JEL Classification: C61, C62, D83, D84, E32
Date posted: June 6, 2003
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