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Heterogeneity, Profitability and Autocorrelations

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  • Youwei Li
  • Xue-Zhong (Tony) He

Abstract

This paper contributes to the development of recent literature on the explanation power and calibration issue of heterogeneous asset pricing models by presenting a simple stochastic market fraction asset pricing model of two types of traders (fundamentalists and trend followers) under a market maker scenario. Statistical analysis based on Monte Carlo simulations shows that the long-run behaviour and convergence of the market prices, long (short)-run profitability of the fundamental (trend following) trading strategy, survivability of chartists, and various under and over-reaction autocorrelation patterns of returns can be characterized by the stability and bifurcations of the underlying deterministic system. Our analysis underpins mechanism on various market behaviour (such as under/over-reactions), market dominance and stylized facts in high frequency financial markets

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 244.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:244

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Keywords: Asset pricing; heterogeneous beliefs; market fraction; profitability; bifurcation; autocorrelations;

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References

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Citations

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Cited by:
  1. Roberto Dieci & Ilaria Foroni & Laura Gardini & Xue-Zhong He, 2005. "Market Mood, Adaptive Beliefs and Asset Price Dynamics," Research Paper Series 162, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3396-3426, October.
  3. Ke, Xiaoling & Shi, Ke, 2009. "Stability and bifurcation in a simple heterogeneous asset pricing model," Economic Modelling, Elsevier, vol. 26(3), pages 680-688, May.
  4. Pawe{\l} Fiedor, 2013. "Frequency Effects on Predictability of Stock Returns," Papers 1310.5540, arXiv.org, revised Nov 2013.

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