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

Roberto Dieci, Noemi Schmitt and Frank Westerhoff

No 177, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

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.

Keywords: boom-bust cycles; asset market participation waves; momentum; value and risk; herding behavior; feedback loops (search for similar items in EconPapers)
JEL-codes: D84 G12 G41 (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-fdg, nep-mac, nep-rmg and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:177

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