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Informational differences and learning in an asset market with boundedly rational agents

By Cees Diks and Pietro Dindo

Abstract

In this paper we study the properties of an asset pricing model where boundedly rational agents respond to incoming news about economic fundamentals such as future dividends. Our aim is to characterize the resulting fluctuations of the market price around the timevarying underlying fundamental value. The starting point is an asset market in which agents can choose among two different degrees of information regarding future dividends. At the same time agents also try to learn the growth rate of the dividend generating process. Their interaction leads to prices that deviate perpetually from the fundamental value in the short run but stay close to it in the long run. In particular, prices exhibit time-varying nonlinear mean reversion, with parameters determined by the learning process

Topics: HB
Publisher: Warwick Business School, Financial Econometrics Research Centre
Year: 2007
OAI identifier: oai:wrap.warwick.ac.uk:1737

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