Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/125083
Authors: 
Hommes, Cars
in't Veld, Daan
Year of Publication: 
2015
Series/Report no.: 
Tinbergen Institute Discussion Paper 15-088/II
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.
Subjects: 
behavioural finance
bounded rationality
heterogeneous expectations
stock prices
financial crisis
JEL: 
C22
G01
G12
Document Type: 
Working Paper

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