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Rational Speculators, Contrarians and Excess Volatility

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  • Lof, Matthijs

Abstract

The VAR approach for testing present value models is applied to a nonlinear asset pricing model with three types of agents, using historical US stock prices and dividends. Besides rational long-term investors, that value assets according to expected dividends, the model includes rational and contrarian speculators. Agents choose their regime based on evolutionary considerations. Supplementing the standard present value model with speculative agents dramatically improves the model's ability to replicate the observed market dynamics. In particular the existence of contrarians can explain some of the most volatile episodes including the 1990s bubble, suggesting this was not a rational bubble.

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  • Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:43490
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    Cited by:

    1. Wilko Bolt & Maria Demertzis & Cees Diks & Cars Hommes & Marco van der Leij, 2014. "Identifying booms and busts in house prices under heterogeneous expectations," DNB Working Papers 450, Netherlands Central Bank, Research Department.
    2. repec:eee:ecmode:v:68:y:2018:i:c:p:74-81 is not listed on IDEAS
    3. repec:eee:dyncon:v:80:y:2017:i:c:p:101-124 is not listed on IDEAS
    4. Li, Mengling & Zheng, Huanhuan & Tai Leung Chong, Terence & Zhang, Yang, 2016. "The stock–bond comovements and cross-market trading," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 417-438.
    5. Andreas Fritz & Michael Stein & Christoph Weber, 2015. "The Role of Heterogeneous Agents in Fuel Markets: Testing Tales of Speculators in Oil Markets," EWL Working Papers 1505, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Aug 2015.
    6. repec:spr:jeicoo:v:12:y:2017:i:2:d:10.1007_s11403-017-0196-1 is not listed on IDEAS
    7. He, Xue-Zhong & Zheng, Huanhuan, 2016. "Trading heterogeneity under information uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 130(C), pages 64-80.
    8. Lof, Matthijs, 2013. "Essays on Expectations and the Econometrics of Asset Pricing," MPRA Paper 59064, University Library of Munich, Germany.
    9. Tiziana Assenza & William A. Brock & Cars H. Hommes, 2017. "Animal Spirits, Heterogeneous Expectations, And The Amplification And Duration Of Crises," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 542-564, January.
    10. Hommes, Cars & in ’t Veld, Daan, 2017. "Booms, busts and behavioural heterogeneity in stock prices," Journal of Economic Dynamics and Control, Elsevier, vol. 80(C), pages 101-124.
    11. repec:eee:dyncon:v:85:y:2017:i:c:p:21-45 is not listed on IDEAS
    12. Kukacka, Jiri & Barunik, Jozef, 2017. "Estimation of financial agent-based models with simulated maximum likelihood," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 21-45.
    13. repec:eee:transe:v:106:y:2017:i:c:p:98-114 is not listed on IDEAS

    More about this item

    Keywords

    asset pricing; heterogeneous agents; VAR approach;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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