An Evolutionary CAPM Under Heterogeneous Beliefs
38 Pages Posted: 20 Aug 2012
Date Written: August 20, 2012
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
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