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Greed, fear and stock market dynamics

Listed author(s):
  • Westerhoff, Frank H.

We present a behavioral stock market model in which traders are driven by greed and fear. In general, the agents optimistically believe in rising markets and thus buy stocks. But if stock prices change too abruptly, they panic and sell stocks. Our model mimics some stylized facts of stock market dynamics: (1) stock prices increase over time, (2) stock markets sometimes crash, (3) stock prices show little pair correlation between successive daily changes, and (4) periods of low volatility alternate with periods of high volatility. A strong feature of the model is that stock prices completely evolve according to a deterministic low-dimensional nonlinear law of motion.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378437104008489
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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 343 (2004)
Issue (Month): C ()
Pages: 635-642

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Handle: RePEc:eee:phsmap:v:343:y:2004:i:c:p:635-642
DOI: 10.1016/j.physa.2004.06.059
Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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  1. C. H. Hommes, 2001. "Financial markets as nonlinear adaptive evolutionary systems," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 149-167.
  2. G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005. "Tobin tax and market depth," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 213-218.
  3. Cont, Rama & Bouchaud, Jean-Philipe, 2000. "Herd Behavior And Aggregate Fluctuations In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 170-196, June.
  4. Gudrun Ehrenstein, 2002. "Cont-Bouchaud percolation model including Tobin tax," Papers cond-mat/0205320, arXiv.org.
  5. Farmer, J. Doyne & Joshi, Shareen, 2002. "The price dynamics of common trading strategies," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 149-171, October.
  6. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  7. Frank Westerhoff, 2003. "Heterogeneous traders and the Tobin tax," Journal of Evolutionary Economics, Springer, vol. 13(1), pages 53-70, February.
  8. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
  9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  10. Johnson, Neil F. & Jefferies, Paul & Hui, Pak Ming, 2003. "Financial Market Complexity," OUP Catalogue, Oxford University Press, number 9780198526650.
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