In recent years a large number of models of financial markets based on interacting heterogeneous agents have been developed. These models generally allow the size of the different groups of agents to vary according to the evolution of the financial market. Adaptive belief system proposed by...

Stochastic models with economy-wide shocks imply that the welfare costs of aggregate volatility are negligible and contribute little to explaining the equity premium puzzle. Motivated by this failure, this paper introduces idiosyncratic shocks. Drawing on empirical evidence suggesting that the...