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Zbl 1202.91110
Hommes, Cars; Huang, Hai; Wang, Duo
A robust rational route to randomness in a simple asset pricing model. (English)
[J] J. Econ. Dyn. Control 29, No. 6, 1043-1072 (2005). ISSN 0165-1889

Summary: We investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists, trend followers and a market maker. Agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free. Price adjustment is proportional to the excess demand in the asset market. Agents asynchronously update their strategy according to realized net profits in the recent past. As agents become more sensitive to differences in strategy performance, the fundamental steady state becomes unstable and multiple steady states may arise. As the traders' sensitivity to differences in fitness increases, a bifurcation route to chaos sets in due to homoclinic bifurcations of stable and unstable manifolds of the fundamental steady state.

MSC 2000:: *91B25
91B69
37N40 Dynamical systems in optimization and economics

Keywords: heterogeneous beliefs; bounded rationality; market maker scenario; bifurcations; chaos

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