Asset Price And Wealth Dynamics In A Financial Market With Boundedly Rational Heterogeneous Agents

Different from the main paradigm in the modern finance,this paper studies the asset price and wealth dynamics in a financial market with boundedly rational heterogeneous agents. First, we introduce the boundedly rational heterogeneous agent paradigm, and then build a discrete-time model of a financial market where heterogeneous groups of agents allocate their wealth amongst multiple risky assets and a riskless asset. Agents follow different expectation formation schemes for both first and second moments of the distribution of returns. We assume that investors' optimal demand for the risky asset depends on wealth, as a result of CRRA utility. By the agent-based modeling, Multi-ASM are performed in order to analyze related issues about asset price and wealth dynamics.By exerting experiments, we find many meaningful conclution. First, it is showed that the trade followers is the key element to cause the fat tails, volatility clustering and long memory effects in the financial market. Second, fundamentalists and trade followers can coexist in a long run, with no different wealth share. So Friedman's theory that the irrational investors will not survive in the long run because of their inaccurate forcasts will be challenged. Third, by the sensitivity experiments, we find that the longer memory length will conduce more accurate forcast for the trade followers, while the mean-reversion coefficient for the fundamentalists may have no such notable effect. Fourth, althought there is no long-term steady relationship between the market wealth and the assets price, there is some cause and effect connection between them. Fifth, particular attention is paid to return comovement in the financial market. Our experiments confirm the Peng & Xiong(2006)'explain for this anomaly, which said that investors'attention to the market information and industry information, not to the firm private information, cause the return comovement.