- Booms, busts and behavioural heterogeneity in stock prices
- Number of pages
- Amsterdam: Tinbergen Institute
- Tinbergen Institute discussion paper
- Volume | Edition (Serie)
- TI 2015-088/II
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
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 significant behavioural heterogeneity. Our model suggests that behavioural regime switching strongly amplifies booms and busts in stock prices.
- 15088.pd: 168354_15088.pd.pdf: July 2015
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