Beliefs, Strategies, Asset Prices And Investment Returns

The research in my dissertation is composed of two major parts,In Part I, a generation overlapping model is built, in which BSV investors, noise traders and Rational Expectation (RE) investors are present in the same market. This model extends the BSV (1998) model by adding RE investors and noise traders to the market, and has proven that it is limits of arbitrage and unpredictability of irrational investors' behavior that retain, to a great extent, the explanative power of BSV (1998) model. Further analysis on the analytic solution of model equilibrium and on some numerical results shows, that risk-averse RE investors cannot correct the "wrong price", which arises from the cognitive biases of irrational investors, to the informationally efficient price. Implications and interpretations on the market anomalies, such as excess volatility, equity premium, close-end fund discount, overreaction and underreaction, are discussed at the end of this part.Based on almost the same conceptual model as that in Part I, Agent-based Computational Finance (ACF) research is carried out in Part II, with the purpose of solving the survival problems in this model and examining the Friedman (1953) hypothesis. Experiment results indicate, that RE investors and BSV investors will achieve the same expected rate of returns on total wealth and will also confront the same probability of bankruptcy, which means that rational arbitrageurs cannot "eliminate" BSV investors even in the long run.Conclusions drawn in each part are interdependent. It is because RE investors cannot completely eliminate the influence of BSV investors' cognitive biases on asset price, that BSV investors "create a survival space" for themselves. On the other hand, it is because BSV investors may achieve the same expected rate of returns and survive, that they will continuously affect the market price in the long run.