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Heterogeneity, Profitability and Autocorrelations

This paper contributes to the development of recent literature on the explanation power and calibration issue of heterogeneous asset pricing models by presenting a simple stochastic market fraction asset pricing model of two types of traders (fundamentalists and trend followers) under a market maker scenario. It seeks to explain aspects of financial market behaviour (such as market dominance, under and over-reaction, profitability and survivability) and to characterize various statistical properties (including autocorrelation structure) of the stochastic model by using the the dynamics of the underlying deterministic system, traders? behaviour and market fractions. Statistical analysis based on Monte Carlo simulations shows that the long-run behaviour and convergence of the market prices, long (short)-run profitability of the fundamental (trend following) trading strategy, survivability of chartists, and various under and over-reaction autocorrelation patterns of returns can be characterized by the stability and bifurcations of the underlying deterministic system. Our analysis underpins mechanism on various market behaviour (such as under/over-reactions), market dominance and stylized facts in high frequency financial markets.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp147.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 147.

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Length: 44
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:uts:rpaper:147
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Web page: http://www.qfrc.uts.edu.au/

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  1. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Papers cond-mat/0012419, arXiv.org.
  2. Brock, William A & LeBaron, Blake D, 1996. "A Dynamic Structural Model for Stock Return Volatility and Trading Volume," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 94-110, February.
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  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. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  8. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  9. Chiarella, Carl & He, Xue-Zhong, 2003. "Dynamics of beliefs and learning under aL-processes -- the heterogeneous case," Journal of Economic Dynamics and Control, Elsevier, vol. 27(3), pages 503-531, January.
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  12. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  13. Chen, Shu-Heng & Yeh, Chia-Hsuan, 2002. "On the emergent properties of artificial stock markets: the efficient market hypothesis and the rational expectations hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 217-239, October.
  14. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  15. repec:att:wimass:9625 is not listed on IDEAS
  16. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  17. Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Society for Computational Economics, vol. 19(1), pages 95-132, February.
  18. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June.
  19. Hommes, C.H., 2001. "Modeling the stylized facts in finance through simple nonlinear adaptive systems," CeNDEF Working Papers 01-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  20. B. LeBaron, 2001. "A builder's guide to agent-based financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 254-261.
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  25. Chiarella, Carl & He, Xue-Zhong, 2003. "Heterogeneous Beliefs, Risk, And Learning In A Simple Asset-Pricing Model With A Market Maker," Macroeconomic Dynamics, Cambridge University Press, vol. 7(04), pages 503-536, September.
  26. repec:dgr:uvatin:20010014 is not listed on IDEAS
  27. Carl Chiarella & Roberto Dieci & Laura Gardini, 2001. "Speculative Behaviour and Complex Asset Price Dynamics," Research Paper Series 49, Quantitative Finance Research Centre, University of Technology, Sydney.
  28. LeBaron, Blake, 2000. "Agent-based computational finance: Suggested readings and early research," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 679-702, June.
  29. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
  30. Chiarella, Carl & He, Xue-Zhong & Hung, Hing & Zhu, Peiyuan, 2006. "An analysis of the cobweb model with boundedly rational heterogeneous producers," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 750-768, December.
  31. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
  32. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
  33. 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.
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