Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2015-07-27
Number: 15-088/II
Author-Name: Cars Hommes
Author-Workplace-Name: University of Amsterdam
Author-Name: Daan in't Veld
Author-Workplace-Name: University of Amsterdam
Title: Booms, Busts and Behavioural Heterogeneity in Stock Prices
Abstract: We empirically evaluate a behavioural model with boundedly rational traders who disagree about the persistence of deviations from the fundamental stock price. Fundamentalist traders believe in mean-reversion, while chartists extrapolate trends. Agents gradually switch between the two rules, based upon their relative performance, leading to self-reinforcing regimes of mean-reversion and trend-following. For the fundamental price we use well-known models of Gordon (1962) and Campbell and Cochrane (1999). We estimate the two-type switching model using U.S. stock prices until 2012Q4 and find signicant behavioural heterogeneity. Our model suggests that behavioural regime switching strongly amplifies booms and busts in stock prices.
Classification-JEL: C22, G01, G12
Keywords: behavioural finance, bounded rationality, heterogeneous expectations, stock prices, financial crisis
File-Url: https://papers.tinbergen.nl/15088.pdf
File-Format: application/pdf
File-Size: 423319 bytes
Handle: RePEc:tin:wpaper:20150088