An Evolutionary CAPM Under Heterogeneous Beliefs

38 Pages Posted: 20 Aug 2012

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Roberto Dieci

Department of Mathematics, University of Bologna

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Kai Li

Macquarie Business School, Macquarie University

Date Written: August 20, 2012

Abstract

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

Keywords: evolutionary CAPM, heterogeneous beliefs, market stability, spill-over effects, volatility, trading volume

JEL Classification: D84, G12

Suggested Citation

Chiarella, Carl and Dieci, Roberto and He, Xue-Zhong 'Tony' and Li, Kai, An Evolutionary CAPM Under Heterogeneous Beliefs (August 20, 2012). 25th Australasian Finance and Banking Conference 2012, Available at SSRN: https://ssrn.com/abstract=2132375 or http://dx.doi.org/10.2139/ssrn.2132375

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Roberto Dieci

Department of Mathematics, University of Bologna ( email )

Piazza di Porta San Donato, 5
Bologna, I-40126
Italy

HOME PAGE: http://www.unibo.it/Faculty/default.aspx?UPN=roberto.dieci%40unibo.it

Xue-Zhong 'Tony' He (Contact Author)

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kai Li

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

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