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Trading heterogeneity under information uncertainty

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  • He, Xue-Zhong
  • Zheng, Huanhuan

Abstract

Instead of heuristical heterogeneity assumption in the current heterogeneous agent models (HAMs), we derive the trading heterogeneity by introducing information uncertainty about the fundamental value to a HAM. Conditional on their private information about the fundamental value, agents choose different trading strategies when optimizing their expected utilities. This provides a micro-foundation to heterogeneity and switching behavior of agents. We show that the HAM with trading heterogeneity originating from the incomplete information performs equally well, if not better than existing HAMs, in generating bubbles, crashes, and mean-reverting prices. The simulated time series matches with the S&P 500 in terms of power law distribution in returns, volatility clustering and long memory in volatility.

Suggested Citation

  • He, Xue-Zhong & Zheng, Huanhuan, 2016. "Trading heterogeneity under information uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 64-80.
  • Handle: RePEc:eee:jeborg:v:130:y:2016:i:c:p:64-80
    DOI: 10.1016/j.jebo.2016.07.001
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    Cited by:

    1. Marsden, G. & Towse, A., 2017. "Exploring the Assessment and Appraisal of Regenerative Medicines and Cell Therapy Products: Is the NICE Approach Fit for Purpose?," Consulting Reports 001802, Office of Health Economics.
    2. repec:eee:dyncon:v:90:y:2018:i:c:p:408-433 is not listed on IDEAS
    3. repec:spr:jeicoo:v:12:y:2017:i:2:d:10.1007_s11403-017-0196-1 is not listed on IDEAS
    4. Schmitt, Noemi & Westerhoff, Frank, 2017. "On the bimodality of the distribution of the S&P 500's distortion: Empirical evidence and theoretical explanations," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 34-53.
    5. Zhentao Shi & Huanhuan Zheng, 2018. "Structural Estimation of Behavioral Heterogeneity," Papers 1802.03735, arXiv.org, revised Jun 2018.
    6. repec:eee:dyncon:v:91:y:2018:i:c:p:469-484 is not listed on IDEAS

    More about this item

    Keywords

    Information friction; Heterogeneity; Endogeneity; Stock returns; Stylized facts;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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