EconPapers    
Economics at your fingertips  
 

Booms, busts and behavioural heterogeneity in stock prices

Cars Hommes () and in ’t Veld, Daan

Journal of Economic Dynamics and Control, 2017, vol. 80, issue C, 101-124

Abstract: We estimate a behavioural heterogeneous agents model with boundedly rational traders who know the fundamental stock price, but disagree about the persistence of deviations from the fundamental. Some agents (fundamentalists) believe in mean-reversion of stock prices, while others (chartists) expect a continuation of the trend. 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 benchmark price we use two well-known models, the Gordon model with a constant risk premium and the Campbell-Cochrane consumption-habit model with a time-varying risk premium. We estimate a two-type switching model using U.S. stock prices until 2016Q4. The estimations show an improvement over representative agent models that is both statistically and economically significant. Our model suggests that behavioural regime switching strongly amplifies booms and busts, in particular, the dot-com bubble and the financial crisis in 2008.

Keywords: Behavioural finance; Bounded rationality; Heterogeneous expectations; Stock prices; Financial crisis (search for similar items in EconPapers)
JEL-codes: G12 C22 G01 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188917301033
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Booms, Busts and Behavioural Heterogeneity in Stock Prices (2015) Downloads
Working Paper: Booms, busts and behavioural heterogeneity in stock prices (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:80:y:2017:i:c:p:101-124

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-10-22
Handle: RePEc:eee:dyncon:v:80:y:2017:i:c:p:101-124