| Description |
This dissertation is composed of three independent essays, which are related loosely. The first essay is a critical review of some empirical and theoretical literature that emphasizes the amount of liquidity in analyzing the asset price determination process. Based on these reviews, the essay argues that emphasis on the amount of liquidity can be misleading. It also argues that liquidity matters not because it gives rise to higher asset demand but because more funds are required to execute asset transactions that arise from the difference in traders' future expectations. As an alternative, the essay reviews the heterogeneous belief theory, which emphasizes the traders' expectation of future asset price evolutions in analyzing asset price dynamics. The essay argues that the availability of funds to optimists is more critical than their availability to the market as a whole. It is also argued that the more optimistic traders' level of optimism matters more than marketwide optimism, which holds true even when the fraction of optimistic traders is small. The second essay provides a heterogeneous agent model (HAM), which emphasizes the role of expectation in the analysis of bubble-crash dynamics. Unlike some HAMs that focus on analyzing the stability-instability characteristic of steady-states, this essay tries to trace the bubble-crash dynamics step by step within a single cycle. The essay focuses on the analysis of how the existence of trend-chasing traders in asset markets and the shifting weight of trading groups employing different expectation formation rules play in the bubble-crash dynamics. The essay also employs the leverage dynamics in the model, which are relatively new features in HAMs. The essay shows that these three features together contribute to the development of long-lasting bubbles and the occurrence of iv abrupt crashes. The third essay reviews some heterogeneous agent models that utilize the marketmaker scheme as their market clearing system. The focus is on clarifying the meaning of demand for and supply of assets, which are sometimes unclear. The models are classified in terms of how the market maker revises its price quote: responding to traders' asset holding levels or responding to order-imbalances. The essay emphasizes that a clear distinction between stock and flow variables is important in constructing models. |
