Saturday, August 04, 2012

Rajiv Sethi: Belief Heterogeneity

Rajiv Sethi: Belief Heterogeneity the paper described here analyses competing views.  This can be used in the model of speculation and the carry trade in particular.  The simple carry trade is successful for some time and the more successful it is, the more traders are drawn to the trade, increasing its success.  It requires a shock to burst the bubble.

"Not surprisingly, then, the presentation I found most appealing was that of Blake LeBaron. Blake is a pioneer in the development of agent-based computational models of financial markets, and the paper he presented belonged to this class. A large number of different forecasting strategies, some based on fundamental information and others on technical data analysis, compete with each other and with a traditional buy-and-hold strategy in his model. The resulting trading dynamics give rise to asset price returns that exhibit both moderate levels of short-run momentum as well as mean reversion over longer horizons. Moreover, the long run population of forecasting rules is ecologically diverse, with both passive and active strategies well represented. "

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