Abstract:
This paper studies the dynamics of a simple discounted present-value asset-pricing model
where agents have different risk attitudes and follow different expectation formation
schemes for the price distribution. A market-maker scenario is used as the market-clearing
mechanism, in contrast to the more usual Walrasian scenario. In particular, the paper
concentrates on models of fundamentalists and trend followers who follow recursive
geometric-decay (learning) processes (GDP) with both finite and infinite memory. The
analysis depicts how the dynamics are affected by various key elements (or parameters) of
the model, such as the adjustment speed of the market maker, the extrapolation rate of the
trend followers, the decay rate of the GDP, the lag length used in the learning GDP, and
external random factors.
