Converse trading strategies, intrinsic noise and the stylized facts of financial markets
AbstractThis paper proposes a simple asset pricing model with three groups of traders: chartists who believe in the persistence of bull and bear markets, fundamentalists who bet on a reduction of the observed mispricing, and investors who follow a buy-and-hold strategy. The innovative feature of the model concerns the frequency of trading: rather than remaining constant over time, each agent in a group is only assumed to become active with a certain probability over a given market period. Depending on the trading strategy, part of this elementary kind of intrinsic noise is additive and another part is multiplicative. Using bootstrap and Monte Carlo methods, it is demonstrated that this combination can contribute to explaining the stylized facts of the daily returns on financial markets, such as volatility clustering, fat tails, and the autocorrelation patterns.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 12 (2012)
Issue (Month): 3 (June)
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Web page: http://www.tandfonline.com/RQUF20
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