Asset price and wealth dynamics in a  nancial market with heterogeneous agents Carl Chiarella (carl.chiarella@uts.edu.au ) School of Finance and Economics, University of Technology Sydney PO Box 123 Broadway NSW 2007, Australia Roberto Dieci 1 (rdieci@rimini.unibo.it ) Dipartimento di Matematica per le Scienze Economiche e Sociali University of Bologna, I-40126 Bologna, Italy Laura Gardini (gardini@econ.uniurb.it ) Istituto di Scienze Economiche, University of Urbino, I-61029 Urbino, Italy Abstract This paper considers a discrete-time model of a nancial market with one risky asset and one risk-free asset, where the asset price and wealth dynamics are determined by the interaction of two groups of agents, fundamentalists and chartists. In each period each group allocates its wealth between the risky asset and the safe asset according to myopic expected utility maximization, but the two groups have heterogeneous beliefs about the price change over the next period: the chartists are trend extrapolators, while the fundamentalists expect that the price will return to the fundamental. We assume that investors’ optimal demand for the risky asset depends on wealth, as a result of CRRA utility. A market maker is assumed to adjust the market price at the end of each trading period, based on excess demand and on changes of the underlying reference price. The model results in a nonlinear discrete-time dynamical system, with growing price and wealth processes, but it is reduced to a stationary system in terms of asset returns and wealth shares of the two groups. It is shown that the long-run market dynamics are highly dependent on the parameters which characterize agents’ behavior as well as on the initial condition. Moreover, for wide ranges of the parameters a (locally) stable fundamental steady state coexists with a stable “non-fundamental” steady state, or with a stable closed orbit, where only chartists survive in the long-run: such cases require the numerical and graphical investigation of the basins of attraction. Other dynamic scenarios include periodic orbits and more complex attractors, where in general both types of agents survive in the long run, with time varying wealth fractions. Keywords: heterogeneous agents, nancial market dynamics, wealth dy- namics, coexisting attractors JEL-classication: C61, D84, G12 1 Corresponding author. Address: Università degli Studi di Bologna, Facoltà di Economia del Polo di Rimini, Via D. Angherà 22, I-47900 Rimini, Italy. Phone +39 (0541) 434143 1