Annals of Finance

, Volume 9, Issue 2, pp 185–215 | Cite as

An evolutionary CAPM under heterogeneous beliefs

  • Carl Chiarella
  • Roberto Dieci
  • Xue-Zhong He
  • Kai Li


Heterogeneity and evolutionary behaviour of investors are two of the most important characteristics of financial markets. This paper incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within the mean-variance framework. We show that the rational behaviour of agents switching to better-performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.


Evolutionary CAPM Heterogeneous beliefs Market stability Spill-over effects Volatility Trading volume 

JEL Classification

D84 G12 



We would like to thank Cars Hommes for a stimulating discussion in the early stages of this project. We are grateful to valuable comments from two anonymous referees. Dieci gratefully acknowledges a Visiting Professor Appointment at the Quantitative Finance Research Centre, UTS Business School, during which this work was finalised. Dieci also acknowledges support from MIUR under project PRIN 2009 “Local interactions and global dynamics in economics and finance: models and tools” and from EU COST within Action IS1104 “The EU in the new complex geography of economic systems: models, tools and policy evaluation”. Financial support for Chiarella and He from the Australian Research Council (ARC) under Discovery Grant (DP110104487) is gratefully acknowledged.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  • Carl Chiarella
    • 1
  • Roberto Dieci
    • 2
  • Xue-Zhong He
    • 1
  • Kai Li
    • 1
  1. 1.Finance Discipline Group, UTS Business SchoolUniversity of Technology, SydneyBroadwayAustralia
  2. 2.Department of MathematicsUniversity of BolognaBolognaItaly

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