Asset Price Dynamics and Diversification with Heterogeneous Agents

  • Carl Chiarella
  • Roberto Died
  • Laura Gardini
Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 550)


A discrete-time dynamic model of a financial market is developed, where two types of agents, fundamentalists and chartists, allocate their wealth between two risky assets and a safe asset, according to one-period mean-variance maximization. The two groups of agents form different expectations about asset returns and their variance/covariance structure, and this results in different demand functions. At the end of each trading period, agents' demands are aggregated by a market maker, who sets the next period prices as functions of the excess demand. The model results in a high-dimensional nonlinear discrete-time dynamical system, which describes the time evolution of prices and agents' beliefs about expected returns, variances and correlation. It is shown that the unique steady state may become unstable through a Hopf-bifurcation and that an attracting limit cycle, or more complex attractors, exist for particular ranges of the key parameters. In particular, the two risky assets may exhibit “coupled” long-run price fluctuations and time-varying correlation of returns.


Risky Asset Capital Gain Asset Return Market Maker Dividend Yield 
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Copyright information

© Springer-Verlag Berlin Heidelberg 2005

Authors and Affiliations

  • Carl Chiarella
    • 1
  • Roberto Died
    • 2
  • Laura Gardini
    • 3
  1. 1.School of Finance and EconomicsUniversity of Technology SydneyAustralia
  2. 2.Dipartimento di Matematica per le Scienze Economiche e SocialiUniversity of BolognaBolognaItaly
  3. 3.Istituto di Scienze EconomicheUniversity of UrbinoUrbinoItaly

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