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Boom–bust cycles and asset market participation waves: Momentum, value, risk, and herding

Author

Listed:
  • Roberto Dieci

    (University of Bologna (Rimini Campus))

  • Noemi Schmitt

    (Department of Economics, University of Bamberg)

  • Frank Westerhoff

    (Department of Economics, University of Bamberg)

Abstract

We develop an asset market participation model in which investors base their market entry decisions on the momentum, value and risk of the market. Despite our behavioral framework, the model’s fundamental steady state is characterized by standard present-value relations between expected future payouts and the model-implied risk-adjusted return. We derive conditions under which endogenous asset market participation waves and co-evolving boom–bust cycles emerge. Moreover, we show that the asset market may display spontaneous, sharp, and permanent downturns if investors react sensitively to risk, an outcome that goes hand in hand with low asset market participation rates and excess volatility.

Suggested Citation

  • Roberto Dieci & Noemi Schmitt & Frank Westerhoff, 2025. "Boom–bust cycles and asset market participation waves: Momentum, value, risk, and herding," Journal of Evolutionary Economics, Springer, vol. 35(3), pages 513-551, July.
    • Handle: RePEc:spr:joevec:v:35:y:2025:i:3:d:10.1007_s00191-025-00905-w
    DOI: 10.1007/s00191-025-00905-w
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    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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