Trend followers, contrarians and fundamentalists: Explaining the dynamics of financial markets

Noemi Schmitt and Frank Westerhoff

Journal of Economic Behavior & Organization, 2021, vol. 192, issue C, 117-136

Abstract: We propose an empirically motivated financial market model in which speculators rely on trend-following, contrarian and fundamental trading rules to determine their orders. Speculators’ probabilistic rule-selection behavior – the only type of intrinsic randomness in our model – depends on past and current performance indicators. Our model replicates a number of important stylized facts of financial markets, most noteworthy their approximate random walk price behavior. For a large number of speculators, the model’s intrinsic randomness vanishes and its dynamics is driven by an analytically tractable nonlinear map. An in-depth investigation into this map provides the key to understanding how the model functions.

Keywords: Financial markets; technical and fundamental analysis; probabilistic rule-selection behavior; feedback dynamics; bounded rationality and learning; stylized facts (search for similar items in EconPapers)
JEL-codes: C63 D84 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268121004340
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Trend followers, contrarians and fundamentalists: Explaining the dynamics of financial markets (2019)
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:jeborg:v:192:y:2021:i:c:p:117-136

DOI: 10.1016/j.jebo.2021.10.006

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().