Heterogeneity, convergence, and autocorrelations

He, Xue Zhong; Li, Youwei

Abstract

This paper is a contribution to the literature on the explanatory power and calibration of heterogeneous asset pricing models. We set out a new stochastic market-fraction asset pricing model of fundamentalists and trend followers under a market maker. Our model explains key features of financial market behaviour such as market dominance, convergence to the fundamental price and under- and over-reaction. We use the dynamics of the underlying deterministic system to characterize these features and statistical properties, including convergence of the limiting distribution and autocorrelation structure. We confirm these properties using Monte Carlo simulations.

Citation

He, X. Z., & Li, Y. (2008). Heterogeneity, convergence, and autocorrelations. Quantitative finance, 8(1), 59-79. https://doi.org/10.1080/14697680601159500

• Journal Article Type: Article
• Acceptance Date: Dec 7, 2006
• Online Publication Date: Dec 14, 2007
• Publication Date: 2008-02
• Deposit Date: Mar 19, 2019
• Journal: Quantitative Finance
• Print ISSN: 1469-7688
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 8
• Issue: 1
• Pages: 59-79
• DOI: https://doi.org/10.1080/14697680601159500
• Keywords: Asset pricing; Heterogeneous beliefs; Market fraction; Stability; Bifurcation; Market behaviour; Limiting distribution; Autocorrelation
• Public URL: https://hull-repository.worktribe.com/output/1113550
• Publisher URL: https://www.tandfonline.com/doi/full/10.1080/14697680601159500