Co-existence of trend and value in financial markets: Estimating an extended Chiarella model

Adam A. Majewski, Stefano Ciliberti and Jean-Philippe Bouchaud

Journal of Economic Dynamics and Control, 2020, vol. 112, issue C

Abstract: Trend and Value are pervasive anomalies, common to all financial markets. We address the problem of their co-existence and interaction within the framework of Heterogeneous Agent Based Models (HABM). More specifically, we extend the Chiarella (1992) model by adding noise traders and a non-linear demand of fundamentalists. We use Bayesian filtering techniques to estimate the model on monthly time series of prices across a variety of asset classes since 1800. The fundamental value is an output of the estimation, and does not require the use of an external pricing model. Our extended model reproduces many empirical observations, including the non-monotonic relation between past trends and future returns. The destabilizing activity of trend-followers leads to a qualitative change of mispricing distribution, from unimodal to bimodal, meaning that some markets tend to be over- (or under-) valued for long periods of time.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:112:y:2020:i:c:s0165188919301885

DOI: 10.1016/j.jedc.2019.103791

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