Heterogeneous Beliefs and Asset Price Dynamics: A Survey of Recent Evidence

39 Pages Posted: 9 Oct 2017 Last revised: 4 Nov 2017

See all articles by Saskia ter Ellen

Saskia ter Ellen

Norges Bank

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

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Date Written: September 29, 2017

Abstract

This paper reviews the empirical literature on heterogeneous beliefs and asset price dynamics that challenges the traditional rational agent framework. Emphasis is given to the validation and estimation of (dynamic) heterogeneous agent models that have their roots in the agent-based literature. Heterogeneous agent models perform well in describing, explaining, and often forecasting asset markets dynamics, such as equities, foreign exchange, credit, housing, derivatives, and commodities. Our survey suggests that heterogeneous agent models have the ability to produce important stylized facts observed in financial time series and to replicate important episodes of financial turmoil.

Keywords: Expectations, Heterogeneous Agent Models, Bounded Rationality, Asset Price Dynamics

JEL Classification: G12, G15, F31

Suggested Citation

ter Ellen, Saskia and Verschoor, Willem F. C., Heterogeneous Beliefs and Asset Price Dynamics: A Survey of Recent Evidence (September 29, 2017). Norges Bank Working Paper 22. Available at SSRN: https://ssrn.com/abstract=3049252 or http://dx.doi.org/10.2139/ssrn.3049252

Saskia Ter Ellen

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Willem F. C. Verschoor (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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