We investigate asset pricing dynamics in an adaptive evolutionary asset pricing model with fundamentalists, trend followers and a market maker. Agents can choose between a fundamentalist strategy at positive information cost or choose a trend following strategy for free. Price adjustment is proportional to the excess demand in the asset market. Agents asynchronously update their strategy according to realized net profits in the recent past. As agents become more sensitive to differences in strategy performance, the fundamental steady state becomes unstable and multiple steady states may arise. As the traders' sensitivity to differences in fitness increases, a bifurcation route to chaos sets in due to homoclinic bifurcations of stable and unstable manifolds of the fundamental steady state.
JEL classification: E32, G12, D84Keywords: heterogeneous beliefs, bounded rationality, market maker scenario, bifurcations, chaos. * We would like to thank Florian Wagener for stimulating discussions.We also would like to thank two anonymous referees and the editor Ken Judd for helpful comments on an earlier draft.