Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86491
Authors: 
Brock, William
Hommes, Cars
Wagener, Florian
Year of Publication: 
2006
Series/Report no.: 
Tinbergen Institute Discussion Paper 06-080/1
Abstract: 
This paper formalizes the idea that more hedging instruments may destabilize markets when traders are heterogeneous and adapt their behavior according to experience based reinforcement learning. We investigate three different economic settings, a simple mean-variance asset pricing model, a general equilibrium two-period overlapping generations model with heterogeneous expectations and a noisy rational expectations asset pricing model with heterogeneous information signals. In each setting the introduction of additional Arrow securities can destabilize the market, causing a bifurcation of the steady state to multiple steady states, periodic orbits or even chaotic fluctuations.
Subjects: 
Asset pricing
hedging
reinforcement learning
nonlinear dynamics
bifurcations
JEL: 
D52
D53
D83
D84
G32
Document Type: 
Working Paper

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