Asset price in an overlapping generations model with case-based decision makers with short memory

Guerdjikova, Ani

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URN: urn:nbn:de:bsz:180-madoc-26982
Document Type: Working paper
Year of publication: 2004
The title of a journal, publication series: None
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: G12 D81 ,
Subject headings (SWD): Börsenkurs , Anlageverhalten , Entscheidung , Kapitalmarkttheorie , Mehrgenerationenmodell
Keywords (English): Case-Based Decision Theory , financial markets , asset pricing
Abstract: I consider an economy, populated by case-based decision makers with one-period memory. Consumption can be transferred between the periods by the means of a riskless storage technology or a risky asset with iid dividend payments. I analyze the dynamics of asset holdings and asset prices. Whereas an economy in which the investors have low aspiration levels exhibits constant prices and asset holdings, investors with high aspiration levels create cycles, which may be stochastic or deterministic. Arbitrage possibilities, deviation of the price from the fundamental value, predictability of returns and excessive volatility are shown to obtain in a market with case-based investors.
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