------- Forwarded Message Follows ------- To: "'snde_l'" <snde_l(a)email.rutgers.edu> Subject: SNDE_L FW: Artificial Stock Market working paper available Date: Tue, 7 Jan 1997 10:03:29 -0500 Status: RO X-Status: X-Keywords: X-UID: 229 **************************************************************** * To post a message, send it to OWNER-SNDE_L(a)EMAIL.RUTGERS.EDU * * To leave the list, send the message UNSUBSCRIBE SNDE_L * * to MAJORDOMO(a)EMAIL.RUTGERS.EDU * * To resolve any problems, contact MCCLELLAND_R(a)BLS.GOV * **************************************************************** ---------- <bigger> Asset Pricing Under Endogenous Expectations in an Artificial Stock Market by W. B. Arthur, J. H. Holland, , B. LeBaron, R. G. Palmer, and P. Tayler ABSTRACT: We propose a theory of asset pricing based on heterogeneous agents who continually adapt their expectations to the market that these expectations aggregatively create. And we explore the implications of this theory computationally using our Santa Fe artificial stock market. Asset markets, we argue, have a recursive nature in that agents' expectations are formed on the basis of their anticipations of other agents' expectations, which precludes expectations being formed by deductive means. Instead, traders continually hypothesize (continually explore) expectational models, buy or sell on the basis of those that perform best, and confirm or discard these according to their performance. Thus, individual beliefs or expectations become endogenous to the market, and constantly compete within an ecology of others' beliefs or expectations. The ecology of beliefs co-evolves over time. Computer experiments with this endogenous-expectations market explain one of the more striking puzzles in finance: that market traders often believe in such concepts as technical trading, "market psychology," and bandwagon effects, while academic theorists believe in market efficiency and a lack of speculative opportunities. Both views, we show, are correct, but within different regimes. Within a regime where investors explore alternative expectational models at a low rate, the market settles into the rational-expectations equilibrium of the efficient-market literature. Within a regime where the rate of exploration of alternative expectations is higher, the market self-organizes into a complex pattern. It acquires a rich psychology, technical trading emerges, temporary bubbles and crashes occur, and asset prices and trading volume show statistical features (in particular, GARCH behavior) characteristic of actual market data. Postscript is available at: http://www.santafe.edu/sfi/publications/96wplist.html Paper copies can be requested from: wp(a)santafe.edu (All authors are affiliated with the Santa Fe Institute where Arthur is the Citibank Professor. In addition, Holland is Professor of Computer Science and Engineering, University of Michigan, Ann Arbor; LeBaron is Associate Professor of Economics, University of Wisconsin, Madison; Palmer is Professor of Physics, Duke University; and Tayler is with the Dept. of Computer Science, Brunel University, London.) </bigger> =========================================================================