Asset Pricing with Extrapolators and Long-term Investors

In this work I present a model of three investor economy with rational traders, long-term traders and extrapolators, and compare the results with the similar paper of Barberis "Extrapolation and bubbles". I try to model behaviour of the rational traders acting as extrapolators first during the boom stage of the bubble (phenomenon known as "riding the bubble") and counteracting the bubble after it has peaked, as is evident from the "Dot-Com bubble". I analyse two types of models - with extrapolators having fully extrapolative expectations and with partially rational extrapolators. Models predict that, under certain parameter values, presence of rational traders in the economy amplify price of risky asset, while their demand is positive during the intermediate stage of the bubble and negative in the later stages, so I managed to capture the effect of riding the bubble in these particular model settings.