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Technical Analysis Based On Price-Volume Signals And The Power Of Trading Breaks

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Author Info

  • FRANK H. WESTERHOFF

    ()
    (University of Osnabrueck, Department of Economics, Rolandstrasse 8, D-49069 Osnabrueck, Germany)

Abstract

We propose a novel stock market model and investigate the effectiveness of trading breaks. Our nonlinear model consists of two types of traders: while fundamentalists expect prices to return towards their intrinsic values, chartists extrapolate past price movements into the future. Moreover, chartists condition their orders on past trading volume. The model is able to replicate several stylized facts of stock markets such as fat tails and volatility clustering. Using the model as an artificial stock market laboratory we find that trading breaks have the power to reduce volatility and — if fundamentals do not move too strongly — also mispricing.

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Bibliographic Info

Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 09 (2006)
Issue (Month): 02 ()
Pages: 227-244

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Handle: RePEc:wsi:ijtafx:v:09:y:2006:i:02:p:227-244

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Related research

Keywords: Stock market dynamics; technical and fundamental analysis; stylized facts; market efficiency; trading breaks; computer experiments;

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Cited by:
  1. Frank H. Westerhoff, 2008. "The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 228(2+3), pages 195-227, June.
  2. Demary, Markus, 2010. "Transaction taxes and traders with heterogeneous investment horizons in an agent-based financial market model," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 4(8), pages 1-44.
  3. Yeh, Chia-Hsuan & Yang, Chun-Yi, 2010. "Examining the effectiveness of price limits in an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2089-2108, October.
  4. Chia-Hsuan Yeh & Chun-Yi Yang, 2013. "Do price limits hurt the market?," Journal of Economic Interaction and Coordination, Springer, vol. 8(1), pages 125-153, April.
  5. Fischer, Thomas, 2011. "News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents," Darmstadt Discussion Papers in Economics 54196, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).

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