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Heterogeneous beliefs and instability

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Lasselle_Heterogeneous Beliefs and Instability.pdf (78.84Kb)
Date
2001
Author
Lasselle, Laurence
Svizzero, Serge
Tisdell, Clem
Keywords
bounded rationality
chartists
chaos
fundamentalists
rational expectations
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Abstract
While Rational Expectations have dominated the paradigm of expectations formation, they have been more recently challenged on the empirical ground such as, for instance, in the dynamics of the exchange rate. This challenge has led to the introduction of heterogeneous expectations in economic modeling. More specifically, the forecasts of the market participants have been drawn from competing views. Two behaviours are usually considered: agents are either fundamentalist or chartist. Moreover, the possibility of switching from one behaviour to the other one is also assumed. In a simple cobweb model, we study the dynamics associated with different endogenous switching process based on the path of prices. We provide an example with an asymmetric endogenous switching process built on the dynamics of past prices. This example confirms the widespread belief that fundamentalist market behaviour as compared with that of chartist tends to promote market stability.
Citation
School of Economics and Finance discussion paper series ; 0111
Type
Working or discussion paper
Description
Previously in the University eprints HAIRST pilot service at http://eprints.st-andrews.ac.uk/archive/00000057/
Collections
  • Economics & Finance Research
URI
http://ideas.repec.org/p/san/wpecon/0111.html
http://hdl.handle.net/10023/655

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