Booms, Busts and Behavioural Heterogeneity in Stock Prices

Cars Hommes and Daan in't Veld
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Daan in't Veld: University of Amsterdam

No 15-088/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We empirically evaluate a behavioural model with boundedly rational traders who disagree about the persistence of deviations from the fundamental stock price. Fundamentalist traders believe in mean-reversion, while chartists extrapolate trends. Agents gradually switch between the two rules, based upon their relative performance, leading to self-reinforcing regimes of mean-reversion and trend-following. For the fundamental price we use well-known models of Gordon (1962) and Campbell and Cochrane (1999). We estimate the two-type switching model using U.S. stock prices until 2012Q4 and find signicant behavioural heterogeneity. Our model suggests that behavioural regime switching strongly amplifies booms and busts in stock prices.

Keywords: behavioural finance; bounded rationality; heterogeneous expectations; stock prices; financial crisis (search for similar items in EconPapers)
JEL-codes: C22 G01 G12 (search for similar items in EconPapers)
Date: 2015-07-27
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Booms, busts and behavioural heterogeneity in stock prices (2017)
Working Paper: Booms, busts and behavioural heterogeneity in stock prices (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20150088

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