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Asset Pricing, Volatility and Market Behaviour: A Market Fraction Approach

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Abstract

Motivated by recent development in structural agent models on asset pricing, explanation power and calibration issue of those models, this paper presents a simple market fraction model of two types of traders - fundamentalists and trend followers - under a market maker scenario. It is found that asset prices, wealth dynamics and market behaviour are characterised by the dynamics of the underlying deterministic system. The model is able to explain various market behaviour, and generate some of the stylized facts. By introducing two measures on wealth dynamics, we are able to show the limitations of profitability and rationality of different trading strategies. Six significant autocorrelation coefficients (ACs) patterns are charaterized by different types of bifurcation of the underlying deterministic system. In particular, an oscillating and decaying AC pattern with positive ACs for even lags and negative for odd lags can only be generated when the market is dominated by the fundamentalists (that is when the parameters are near the flip bifurcation boundary), and a positive decaying AC pattern with long memory can only be generated when the market is dominated by the trend followers with high decay memory (that is when the parameters are near the Hopf bifurcation boundary). The results show a promising power of stability analysis and bifurcation theory in explaining and calibrating asset price and wealth dynamics, markt behaviour, and generating various econometric properties of financial data.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp95.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 95.

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Date of creation: 01 Jun 2003
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Handle: RePEc:uts:rpaper:95

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Cited by:
  1. Sansone, Alessandro & Garofalo, Giuseppe, 2007. "Asset price dynamics in a financial market with heterogeneous trading strategies and time delays," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 247-257.
  2. Xue-Zhong He & Youwei Li, 2008. "Heterogeneity, convergence, and autocorrelations," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 59-79.
  3. 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.
  4. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2011. "The dynamic behaviour of asset prices in disequilibrium: a survey," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 101-139.
  5. Carl Chiarella & Xue-Zhong He & Duo Wang, 2004. "Statistical Properties of a Heterogeneous Asset Price Model with Time-Varying Second Moment," Research Paper Series 142, Quantitative Finance Research Centre, University of Technology, Sydney.

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