Market entry waves and volatility outbursts in stock markets
Noemi Schmitt and
Frank Westerhoff ()
Journal of Economic Behavior & Organization, 2018, vol. 153, issue C, 19-37
We develop a simple agent-based financial market model in which speculators’ market entry decisions are subject to herding behavior and market risk. In addition, speculators’ orders depend on price trends, market misalignments and fundamental news. Using a mix of analytical and numerical tools, we show that a herding-induced market entry wave may amplify excess demand, triggering lasting volatility outbursts. Eventually, however, higher stock market risk reduces stock market participation and volatility decreases again. Simulations furthermore reveal that our approach is also able to produce bubbles and crashes, excess volatility, fat-tailed return distributions and serially uncorrelated price changes. Moreover, trading volume is persistent and correlated with volatility.
Keywords: Stock markets; Heterogeneous speculators; Exponential replicator dynamics; Herding behavior; Stylized facts (search for similar items in EconPapers)
JEL-codes: C63 D84 G15 (search for similar items in EconPapers)
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Working Paper: Market entry waves and volatility outbursts in stock markets (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:153:y:2018:i:c:p:19-37
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