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Herding, trend chasing and market volatility

Listed author(s):
  • Di Guilmi, Corrado
  • He, Xue-Zhong
  • Li, Kai

We introduce a heterogeneous agent asset pricing model in continuous-time to show that, although trend chasing, switching and herding all contribute to market volatility in price and return and to volatility clustering, their impacts are different. The fluctuations of the market price and return and the level of the significant autocorrelations (ACs) of the absolute and squared returns increase with the intensities of herding and trend chasing based on long time horizon. However an increase in switching intensity reduces the return volatility and in particular a low switching intensity reduces the price volatility and increases the level of the significant ACs, but the effect becomes opposite when the switching intensity is high. We also show that market noise plays a more important role than fundamental noise on the power-law behavior of returns.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 48 (2014)
Issue (Month): C ()
Pages: 349-373

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Handle: RePEc:eee:dyncon:v:48:y:2014:i:c:p:349-373
DOI: 10.1016/j.jedc.2014.07.008
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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