HETEROGENEOUS EXPECTATIONS AND ASSET PRICE DYNAMICS

Within the seminal asset-pricing model by Brock and Hommes (Journal of Economic Dynamics Control 22, 1235–1274, 1998), heterogeneous boundedly rational agents choose between a fixed number of expectation rules to forecast asset prices. However, agents’ heterogeneity is limited in the sense that they typically switch between a representative technical and a representative fundamental expectation rule. Here, we generalize their framework by considering that all agents follow their own time-varying technical and fundamental expectation rules. Estimating our model using the method of simulated moments reveals that it is able to explain the statistical properties of the daily and monthly behavior of the S&P500 quite well. Moreover, our analysis reveals that heterogeneity is not only a realistic model property but clearly helps to explain the intricate dynamics of financial markets.

A Theatre Attendance Model

In this manuscript, the author proposes a model that constitutes a generalization of the El Farol Bar problem. In this model, in each period, each one of the n agents decides the arrival time at a theatre with free entry in which there are k (k<n) seats. Each individual wants to minimize the waiting time (before the beginning of the show) but prefers to assist to the show comfortably seated. The author introduces a utility function that takes into account these aspects, in which also agents' heterogeneity, in terms of different patience or comfort preferences, is considered. The author examines some possible approaches to this problem, and provides a new inductive reasoning modeling for a simplified version of this Theatre Attendance model, according to which each agent decides the arrival time at the theatre in a certain period by looking at the outcome of the previous round.