BUBBLES AND CRASHES: OPTIMISM, TREND EXTRAPOLATION AND PANIC

Frank Westerhoff

International Journal of Theoretical and Applied Finance (IJTAF), 2003, vol. 06, issue 08, 829-837

Abstract: The observation that large drawdowns are outliers suggests that a special mechanism may be responsible for large crashes. We develop a simple model with heterogeneous interacting agents which follow technical and fundamental trading rules to determine their orders. Although the chartists are optimistic most of the time, they panic if prices drop sharply. Our main finding is that the selling impact due to a panic attack may be so large that it directly leads to the next panic attack. Such behavior generates temporal correlation in prices, i.e., causes large drawdowns.

Keywords: Bubbles and crashes; drawdowns and drawups; technical and fundamental analysis; optimism and panic; JEL classification code D84; G14 (search for similar items in EconPapers)
Date: 2003
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024903002237
Access to full text is restricted to subscribers

Related works:
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:wsi:ijtafx:v:06:y:2003:i:08:n:s0219024903002237

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024903002237

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().