We estimate a dynamic asset pricing model characterized by heterogeneous boundedly rational agents. The fundamental value of the risky asset is publicly available to all agents, but they have different beliefs about the persistence of deviations of stock prices from the fundamental benchmark. An...

A large set of 5350 trend following technical trading rules is applied to LIFFE and CSCE cocoa futures prices, and to the Pound-Dollar exchange rate, in the period 1983:1-1997:6. We find that 72% of the trading rules generates positive profits, even when correcting for transaction and borrowing...

We propose a class of stochastic volatility (SV) option pricing models that is more flexible than the more conventional models in different ways. We assume the conditional variance of the stock returns to be driven by an affine function of an arbitrary number of latent factors, which follow...

Recent research has emphasized that permanent changes in the innovation variance (caused by structural shifts or an integrated volatility process) lead to size distortions in conventional unit root tests. Cavaliere and Taylor (2004) and Beare (2004) propose nonparametrically corrected versions...

Different theories of expectation formation and learning usually yield different outcomes for realized market prices in dynamic models. The purpose of this paper is to investigate expectation formation and learning in a controlled experimental environment. Subjects are asked to predict the next...

Despite the pervasiveness of the efficient markets paradigm in the academic finance literature, the use of various moving average (MA) trading rules remains popular with financial market practitioners. This paper proposes a stochastic dynamic financial market model in which demand for traded...

The use of various moving average (MA) rules remains popular with financial market practitioners. These rules have recently become the focus of a number empirical studies, but there have been very few studies of financial market models where some agents employ technical trading rules of the type...

The time evolution of aggregate economic variables, such as stock prices, is affected by market expectations of individual investors. Neo-classical economic theory assumes that individuals form expectations rationally, thus enforcing prices to track economic fundamentals and leading to an...

This chapter reviews some work on bounded rationality, expectation formation and learning in complex markets, using the familiar demand-supply cobweb model. We emphasize two stories of bounded rationality, one story of adaptive learning and another story of evolutionary selection. According to...

This chapter reviews some work on bounded rationality, expectation formation and learning incomplex markets, using the familiar demand-supply cobweb model. We emphasize two stories of boundedrationality, one story of adaptive learning and another story of evolutionary selection. According to...