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Diffusion Processes for Asset Prices under Bounded Rationality

Roberto Monte - Università di Tor Vergata

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We study an asset prices model under bounded rationality. In the economy there are rational traders and noise traders. If noise traders market behaviour is modeled as a pure noise (random walk) and rational traders compute the expected price as a geometric average of the observed prices (bounded rationality), then we show that in the limit, as the trade interval goes to zero, the asset price is described by a mean reverting process.