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Carl Chiarella
School of Finance and Economics, University of Technology Sydney
Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices
Wednesday 6th, October 14:05-14:55pm,
Carslaw Lecture Theatre 273.
This paper analyzes the dynamics of an explicit random process of
prices and price expectations of finitely many assets in an
economy with overlapping generations of heterogeneous consumers.
They maximize expected utility with respect to subjective
transition probabilities defined by Markov kernels which describe
the forecasting behavior of agents. Given such forecasting rules
(predictors) and an exogenous process of dividends, the evolution
of equilibrium asset prices and expectations is described by a
random dynamical system in the sense of Arnold (1998). The paper
investigates the long run behavior (stationary solutions) by
proving the existence and stability of random fixed points for
mean-variance preferences under various predictors, including
unbiased predictions, adaptive, as well as OLS forecasting. An
explicit characterization of rational expectations solutions is
given, providing a full dynamic characterization of asset price
processes for the classical CAPM in the case of stationary OLG
economies. Numerical simulations are used to compare the
performance of the different predictors under an AR (1) dividend
processes.
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