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Speculative behavior and the dynamics of interacting stock markets

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  • Schmitt, Noemi
  • Westerhoff, Frank

Abstract

We develop a simple agent-based financial market model in which heterogeneous speculators apply technical and fundamental analysis to trade in two different stock markets. Speculators׳ strategy/market selections are repeated at each time step and depend on predisposition effects, herding behavior and market circumstances. Simulations reveal that our model is able to explain a number of nontrivial statistical properties of and between international stock markets, including bubbles and crashes, fat-tailed return distributions, volatility clustering, persistent trading volume, coevolving stock prices and cross-correlated volatilities. Against this background, our model may be deemed to have been validated.

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  • Schmitt, Noemi & Westerhoff, Frank, 2014. "Speculative behavior and the dynamics of interacting stock markets," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 262-288.
  • Handle: RePEc:eee:dyncon:v:45:y:2014:i:c:p:262-288
    DOI: 10.1016/j.jedc.2014.05.009
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    More about this item

    Keywords

    Stock markets; Comovements; Cross-correlations; Technical and fundamental analysis; Agent-based modeling; Simulation analysis;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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