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Asymmetric returns, gradual bubbles and sudden crashes

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  • Weihong Huang
  • Huanhuan Zheng
  • Wai-Mun Chia

Abstract

By applying the deterministic heterogenous agent model developed by Huang et al. [Financial crises and interacting heterogeneous agents. Journal of Economic Dynamics and Control 34, no. 6: 1105--22], this paper examines the phenomena of asymmetric returns, gradual bubbles and sudden crashes. It shows that (i) returns are asymmetric because the most positive returns initiated by fundamentalist are attenuated by the selling force of chartists, while the most negative return initiated by chartists is hardly affected by the buying force of fundamentalists; (ii) bubbles arise gradually while crashes happen suddenly as the upward price movements are counterbalanced while the downward movements are enhanced by fundamentalists. It also shows for the first time that deterministic dynamic model can simultaneously generate a wide range of stylized facts common across financial markets, including those hardly duplicated by current heterogeneous agent models, such as long-range dependence.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 19 (2013)
Issue (Month): 5 (May)
Pages: 420-437

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Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:420-437

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  1. Amilon, Henrik, 2008. "Estimation of an adaptive stock market model with heterogeneous agents," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 342-362, March.
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Cited by:
  1. Huang, Weihong & Chen, Zhenxi, 2014. "Modeling regional linkage of financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 18-31.

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