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Asymmetry of technical analysis and market price volatility

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Abstract

Within the framework of heterogeneity and bounded rationality, this papermodels the financial market as an interaction of two types of boundedly rationalinvestors—fundamentalists and chartists. The model is characterised by a nonlin-ear dynamical system. Applying stability and bifurcation theory, we examine thedynamics of the market price and market behaviour. It is found that investors’behaviour, in particular the asymmetric beliefs of the chartists and the interactionof the two types of investors play a very important role in explaining the marketvolatility. Numerical simulations of the corresponding stochastic model demon-strate that the model is able to generate the stylised facts, including volatilityclustering, high kurtosis, and the long-range dependence of asset return observedin financial markets.

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  • Min Zheng & Duo Wang & Xue-Zhong He, 2009. "Asymmetry of technical analysis and market price volatility," Published Paper Series 2009-6, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ppaper:2009-6
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    Cited by:

    1. Stefanescu, Razvan & Dumitriu, Ramona, 2016. "Particularitǎţi ale evoluţiei variabilelor financiare [Some particularities of the financial variables evolution]," MPRA Paper 73481, University Library of Munich, Germany, revised 02 Sep 2016.
    2. Zheng, Min & Liu, Ruipeng & Li, Youwei, 2018. "Long memory in financial markets: A heterogeneous agent model perspective," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 38-51.

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    More about this item

    Keywords

    price fluctuation; bounded rationality; asymmetrical beliefs; stability; bifurcation;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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