Heterogeneity, Profitability and Autocorrelations

Youwei Li and Xuezhong (Tony) He ()

No 244, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: This paper contributes to the development of recent literature on the explanation power and calibration issue of heterogeneous asset pricing models by presenting a simple stochastic market fraction asset pricing model of two types of traders (fundamentalists and trend followers) under a market maker scenario. Statistical analysis based on Monte Carlo simulations shows that the long-run behaviour and convergence of the market prices, long (short)-run profitability of the fundamental (trend following) trading strategy, survivability of chartists, and various under and over-reaction autocorrelation patterns of returns can be characterized by the stability and bifurcations of the underlying deterministic system. Our analysis underpins mechanism on various market behaviour (such as under/over-reactions), market dominance and stylized facts in high frequency financial markets

Keywords: Asset pricing; heterogeneous beliefs; market fraction; profitability; bifurcation; autocorrelations (search for similar items in EconPapers)
JEL-codes: C15 D84 G12 (search for similar items in EconPapers)
Date: 2005-11-11
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Citations: View citations in EconPapers (4)

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