Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/85929 
Year of Publication: 
2003
Series/Report no.: 
Tinbergen Institute Discussion Paper No. 03-073/1
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We propose a new framework for studying the evolution of heterogeneous beliefs in a dynamic feedback setting. Beliefs distributions are defined on a beliefs space representing a continuum of possible strategies agents can choose from. Agents base their choices on past performances, re-evaluating strategies as new information becomes available. The distribution of beliefs among agents is updated using a continuous choice model. This leads to price dynamics in which the beliefs distribution evolves together with realized prices. By considering individual choices as random variables, which is natural in a random utility framework, heterogeneity can be seen to act as a 'natural source of randomness'. Allowing for modeling the dynamics explicitly, our framework gives rise to a random dynamical system (RDS), the stochastic properties of which are directly related to the time varying beliefs distribution. We consider some asset pricing examples and discuss several conditions (dependence among agents, unequal market impact) under which the randomness persists even as the number of agents tends to infinity.
Subjects: 
Expectation formation
Heterogeneity
Continuous beliefs
Expectations feedback
Endogenous noise
Random dynamical systems
JEL: 
C00
D84
G12
Document Type: 
Working Paper

Files in This Item:
File
Size
273.46 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.