Trading heterogeneity under information uncertainty

Publication Type:
Journal Article
Citation:
Journal of Economic Behavior and Organization, 2016, 130 pp. 64 - 80
Issue Date:
2016-10-01
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© 2016 Elsevier B.V. Instead of heuristical heterogeneity assumption in the current heterogeneous agent models (HAMs), we derive the trading heterogeneity by introducing information uncertainty about the fundamental value to a HAM. Conditional on their private information about the fundamental value, agents choose different trading strategies when optimizing their expected utilities. This provides a micro-foundation to heterogeneity and switching behavior of agents. We show that the HAM with trading heterogeneity originating from the incomplete information performs equally well, if not better than existing HAMs, in generating bubbles, crashes, and mean-reverting prices. The simulated time series matches with the S&P 500 in terms of power law distribution in returns, volatility clustering and long memory in volatility.
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