IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

New models of trader beliefs and their application for explaining financial bubbles

  • Chen, Zhiping
  • Duan, Qihong
Registered author(s):

    One challenging and exigent problem in behavior finance is how to establish verifiable models describing the appearance and burst of price bubbles. Current results are enhanced in this paper through a series of improvement as follows: new models are proposed for describing the return and dividend processes, especially the trader's behavior with the adaptive expectation belief and the bounded rational expectation belief, respectively; with these models, we establish dynamical systems in terms of the price-to-earnings ratio and the forecast-to-earnings ratio; the detailed solution and asymptotic analysis of these equations provide new, elaborate and quantitative explanations for both the formation and disappearance of different price bubbles; inspired by the herd behavior framework, a new random belief evolutionary mechanism is devised to model the belief change between two beliefs; a specific genetic algorithm is designed to efficiently estimate model parameters; simulation and empirical studies are carried out to illustrate the application of new methods. Both theoretical and empirical results sufficiently show the reasonability, practicality, efficiency and robustness of our new models and methods for properly explaining the appearance and burst of different kinds of price bubbles.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311001441
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 28 (2011)
    Issue (Month): 5 (September)
    Pages: 2215-2227

    as
    in new window

    Handle: RePEc:eee:ecmode:v:28:y:2011:i:5:p:2215-2227
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Chow, Gregory C, 1989. "Rational versus Adaptive Expectations in Present Value Models," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 376-84, August.
    2. Richmond, Peter, 2007. "A roof over your head; house price peaks in the UK and Ireland," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(1), pages 281-287.
    3. Robert J. Shiller, 2002. "From Efficient Market Theory to Behavioral Finance," Cowles Foundation Discussion Papers 1385, Cowles Foundation for Research in Economics, Yale University.
    4. Eugene Fama & F. & Kenneth R. French, . "The Equity Premium."," CRSP working papers 522, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
    5. D. Sornette, 2003. "Critical Market Crashes," Papers cond-mat/0301543, arXiv.org.
    6. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
    7. Beladi, Hamid & Choudhary, Munir A S & Parai, Amar K, 1993. "Rational and Adaptive Expectations in the Present Value Model of Hyperinflation," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 511-14, August.
    8. Watanabe, Kota & Takayasu, Hideki & Takayasu, Misako, 2007. "Extracting the exponential behaviors in the market data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 336-339.
    9. Kirman, Alan & Teyssiere, Gilles, 2005. "Testing for bubbles and change-points," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 765-799, April.
    10. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & van de Velden, Henk, 2008. "Expectations and bubbles in asset pricing experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 116-133, July.
    11. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2003. "Bifurcation Routes to Volatility Clustering under Evolutionary Learning," CeNDEF Working Papers 03-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    12. Campbell, J.Y. & Shiller, R.J., 1988. "Stock Prices, Earnings And Expected Dividends," Papers 334, Princeton, Department of Economics - Econometric Research Program.
    13. Caginalp, G. & Ilieva, V., 2008. "The dynamics of trader motivations in asset bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 641-656, June.
    14. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
    15. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
    16. Boswijk, H.P. & Hommes C.H. & Manzan, S., 2005. "Behavioral Heterogeneity in Stock Prices," CeNDEF Working Papers 05-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    17. Sornette, Didier & Johansen, Anders, 1997. "Large financial crashes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 245(3), pages 411-422.
    18. Krawiecki, A. & HoƂyst, J.A., 2003. "Stochastic resonance as a model for financial market crashes and bubbles," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 317(3), pages 597-608.
    19. Parnaudeau, Miia, 2008. "European Business Fluctuations in the Austrian Framework," MPRA Paper 25046, University Library of Munich, Germany.
    20. Gilli, M. & Winker, P., 2003. "A global optimization heuristic for estimating agent based models," Computational Statistics & Data Analysis, Elsevier, vol. 42(3), pages 299-312, March.
    21. Domenico Depalo, 2006. "Japan: The Case For A Taylor Rule? A Simple Approach," Pacific Economic Review, Wiley Blackwell, vol. 11(4), pages 327-546, December.
    22. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
    23. LeBaron, Blake, 2006. "Agent-based Computational Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 24, pages 1187-1233 Elsevier.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:28:y:2011:i:5:p:2215-2227. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.