Rational Speculators, Contrarians and Excess Volatility
Management Science, 61,1889-1901, (2015)
34 Pages Posted: 30 Dec 2012 Last revised: 2 Sep 2018
Date Written: January 31, 2014
Abstract
The VAR approach for testing present value models is applied to a nonlinear asset pricing model with three types of agents, using historical US stock prices and dividends. Besides rational long-term investors, that value assets according to expected dividends, the model includes rational and contrarian speculators. Agents choose their regime based on evolutionary considerations. Supplementing the standard present value model with speculative agents dramatically improves the model’s ability to replicate the observed market dynamics. In particular the existence of contrarians can explain some of the most volatile episodes including the 1990s bubble, suggesting this was not a rational bubble.
Keywords: asset pricing, heterogeneous agents, VAR approach
JEL Classification: C58, D84, G11
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Coordination of Expectations in Asset Pricing Experiments
By Cars H. Hommes, Joep Sonnemans, ...
-
Behavioral Heterogeneity in Stock Prices
By H. Peter Boswijk, Cars H. Hommes, ...
-
Behavioral Heterogeneity in Stock Prices
By H. Peter Boswijk, Cars H. Hommes, ...
-
Heterogeneity, Market Mechanisms, and Asset Price Dynamics
By Carl Chiarella, Roberto Dieci, ...
-
Complex Evolutionary Systems in Behavioral Finance
By Cars H. Hommes and Florian Wagener
-
More Hedging Instruments May Destabilize Markets
By William A. Brock, Cars H. Hommes, ...
-
By Anke Gerber, Bodo Vogt, ...