Fundamentalists, chartists and asset pricing anomalies

Sandrine Jacob Leal

Quantitative Finance, 2015, vol. 15, issue 11, 1837-1850

Abstract: This paper investigates whether excess volatility of asset prices and serial correlations of stock monthly returns may be explained by the interactions between fundamentalists and chartists. Fundamentalists forecast future prices cum dividends through an adaptive learning rule. In contrast, chartists forecast future prices based on the observation of past price movements. Numerical simulations reveal that the interplay of fundamentalists and chartists robustly generates excess volatility of asset prices, volatility clustering, trends in prices (i.e. positive serial correlations of returns) over short horizons and oscillations in prices (i.e. negative serial correlations of returns) over long horizons, often observed in financial data. Moreover, we find that the memory of the learning rule plays a key role in explaining the above-mentioned stylized facts. In particular, we establish that excess volatility of asset prices; volatility clustering and autocorrelation of returns at different horizons emerge when fundamentalists have short memory. However, volatility clustering as well as short-run and long-run dependencies, observed in financial time series, are more pronounced when fundamentalists have longer memory.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:15:y:2015:i:11:p:1837-1850

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DOI: 10.1080/14697688.2014.972434

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