Heterogeneity, Profitability and Autocorrelations

Xuezhong (Tony) He () and Youwei Li

No 147, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

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. It seeks to explain aspects of financial market behaviour (such as market dominance, under and over-reaction, profitability and survivability) and to characterize various statistical properties (including autocorrelation structure) of the stochastic model by using the the dynamics of the underlying deterministic system, traders? behaviour and market fractions. 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; stability; bifurcation; market behaviour; profitability; survivability; autocorrelation (search for similar items in EconPapers)
Pages: 45 pages
Date: 2005-01-01
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Heterogeneity, Profitability and Autocorrelations (2005)
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