Heterogeneity, Market Mechanisms, and Asset Price Dynamics

Quantitative Finance Research Centre Research Paper No. 231

59 Pages Posted: 3 Mar 2009

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Roberto Dieci

Department of Mathematics, University of Bologna

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Date Written: September 1, 2008

Abstract

This chapter surveys the boundedly rational heterogeneous agent (BRHA) models of financial markets, to the development of which the authors and several co-authors have contributed in various papers. We give particular emphasis to role of the market clearing mechanism used, the utility function of the investors, the interaction of price and wealth dynamics, portfolio implications, the impact of stochastic elements on the markets dynamics, and calibration of this class of models. Due to agents' behavioural features and market noise, the BRHA models are both nonlinear and stochastic. We show that the BRHA models produce both a locally stable fundamental equilibrium corresponding to that of standard paradigm, as well as instability with a consequent rich range of possible complex behaviours characterised both indirectly by simulation and directly by stochastic bifurcations. A calibrated model is able to reproduce quite well the stylized facts of financial markets. The BRHA framework is thus able to accommodate market features that seem not easily reconcilable for the standard financial market paradigm, such as fat tail, volatility clustering, large excursions from the fundamental and bubbles.

Keywords: bounded rationality, interacting heterogeneous agents, behavioural finance, nonlinear economic dynamics, complexity

Suggested Citation

Chiarella, Carl and Dieci, Roberto and He, Xue-Zhong 'Tony', Heterogeneity, Market Mechanisms, and Asset Price Dynamics (September 1, 2008). Quantitative Finance Research Centre Research Paper No. 231 . Available at SSRN: https://ssrn.com/abstract=1352111 or http://dx.doi.org/10.2139/ssrn.1352111

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Roberto Dieci

Department of Mathematics, University of Bologna ( email )

Piazza di Porta San Donato, 5
Bologna, I-40126
Italy

HOME PAGE: http://www.unibo.it/Faculty/default.aspx?UPN=roberto.dieci%40unibo.it

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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