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A Behavioural Asset Pricing Model with a Time-Varying Second Moment

Carl Chiarella, Xuezhong (Tony) He and Duo Wang

No 141, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: We develop a simple behavioural asset pricing model with fundamentalists and chartists to study price behaviour in financial markets. Within our model, the market impact of the weighting process of the conditional mean and variance of the chartists and investors' reactions are analysed. Price dynamics of the deterministic model under/over-reactions are analyzed. It shows different price dynamics and routes to complicated price behaviour when the chartists act as either trend followers or contrarians. It is found that (in a separate paper Chiarella et al (2004)) this analysis can be used to establish some connections between the statistical properties of the nonlinear stochastic system (such as distribution density and autocorrelation patterns of returns, in particular the stylised facts, such as fat tails, skewness, high kurtosis and long memory, observed in high frequency financial data) and the stability and bifurcation of the underlying deterministic system are established.

Keywords: fundamentalists; chartists, stability; bifurcation; investors' under- and over-reactions; stylized facts (search for similar items in EconPapers)
JEL-codes: C60 D83 D84 E21 E32 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2004-11-01
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac, nep-mic and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as: Chiarella, C., He, X. and Wang, D., 2006, "A Behavioural Asset Pricing Model with a Time-Varying Second Moment", Chaos, Solitons and Fractals, 29(3), 536-555.

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