Asymmetry of technical analysis and market price volatility

Min Zheng, Duo Wang and Xuezhong (Tony) He ()
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Duo Wang: School of Mathematical Sciences, Peking University

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: Within the framework of heterogeneity and bounded rationality, this papermodels the financial market as an interaction of two types of boundedly rationalinvestors—fundamentalists and chartists. The model is characterised by a nonlin-ear dynamical system. Applying stability and bifurcation theory, we examine thedynamics of the market price and market behaviour. It is found that investors’behaviour, in particular the asymmetric beliefs of the chartists and the interactionof the two types of investors play a very important role in explaining the marketvolatility. Numerical simulations of the corresponding stochastic model demon-strate that the model is able to generate the stylised facts, including volatilityclustering, high kurtosis, and the long-range dependence of asset return observedin financial markets.

Keywords: price fluctuation; bounded rationality; asymmetrical beliefs; stability; bifurcation (search for similar items in EconPapers)
JEL-codes: C62 D53 E32 E44 G12 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2009-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in: Zheng, M., Wang, D. and He, X., 2009, "Asymmetry of technical analysis and market price volatility", China Finance Review, 61(2), 61-89.

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