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
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)
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Working Paper: Booms, Busts and Behavioural Heterogeneity in Stock Prices (2015)
Working Paper: Booms, busts and behavioural heterogeneity in stock prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:80:y:2017:i:c:p:101-124
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok
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