Asymmetric returns, gradual bubbles and sudden crashes
Chia, Wai Mun
Date of Issue2013
School of Humanities and Social Sciences
By applying the deterministic heterogenous agent model developed by Huang et al. [Financial crises and interacting heterogeneous agents. Journal of Economic Dynamics and Control 34, no. 6: 1105–22], this paper examines the phenomena of asymmetric returns, gradual bubbles and sudden crashes. It shows that (i) returns are asymmetric because the most positive returns initiated by fundamentalist are attenuated by the selling force of chartists, while the most negative return initiated by chartists is hardly affected by the buying force of fundamentalists; (ii) bubbles arise gradually while crashes happen suddenly as the upward price movements are counterbalanced while the downward movements are enhanced by fundamentalists. It also shows for the first time that deterministic dynamic model can simultaneously generate a wide range of stylized facts common across financial markets, including those hardly duplicated by current heterogeneous agent models, such as long-range dependence.
The European journal of finance