Booms, Busts and Behavioural Heterogeneity in Stock Prices

Arbeitspapier

We empirically evaluate a behavioural model with boundedly rational traders who disagree about the persistence of deviations from the fundamental stock price. Fundamentalist traders believe in mean-reversion, while chartists extrapolate trends. Agents gradually switch between the two rules, based upon their relative performance, leading to self-reinforcing regimes of mean-reversion and trend-following. For the fundamental price we use well-known models of Gordon (1962) and Campbell and Cochrane (1999). We estimate the two-type switching model using U.S. stock prices until 2012Q4 and find signicant behavioural heterogeneity. Our model suggests that behavioural regime switching strongly amplifies booms and busts in stock prices.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. 15-088/II

Classification and Topics

• Classification: Wirtschaft ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Financial Crises ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: behavioural finance ; bounded rationality ; heterogeneous expectations ; stock prices ; financial crisis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hommes, Cars ; in't Veld, Daan
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/125083
• Last update: 10.03.2025, 11:44 AM CET