Asymmetric returns, gradual bubbles and sudden crashes

Huanhuan Zheng, Weihong Huang, Wai-Mun Chia

Research output: Contribution to journalArticlepeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)420-437
Number of pages18
JournalEuropean Journal of Finance
Volume19
Issue number5
Early online date18 Apr 2012
DOIs
Publication statusPublished - May 2013

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