The Impact of Technical Analysis on Asset Price Dynamics

J.-H. Steffi Yang and Stephen E. Satchell

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We study the impact of technical analysis in a context of heterogeneous, utility-maximising agents. A framework is provided to capture observed diversity in forecast estimates as a result of interaction between prior beliefs and asymmetric information. Using investment decisions of fundamentalists as a benchmark, agents’ optimal demand difference, which reflects expectation heterogeneity and the use of technical analysis, offers insights into the endogenous uncertainly in asset pricing behaviour. Technical analysis results in price feedback. We define a new family of feedback rules over cumulative distribution functions. Using bifurcation analysis, we show how prices asymptotically approach equilibrium and how significant feedback effects drive them off the equilibrium path. Both trend chasing strategy and contrarian strategy among technical trades are described in the model: the latter leads prices to overshoot the fundamental value with a high frequency; whereas in the former case, prices exhibit prolonged cyclic behaviour.

Keywords: price dynamics; heterogeneity; bifurcation; feedback trading (search for similar items in EconPapers)
JEL-codes: D82 D84 G12 G14 (search for similar items in EconPapers)
Pages: 38
Date: 2002-07
New Economics Papers: this item is included in nep-fmk
Note: EM (updated August 2003)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0219

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