Heterogeneity, convergence, and autocorrelations

Xue-Zhong He, Youwei Li

Research output: Contribution to journalArticlepeer-review

45 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)59-79
Number of pages21
JournalQuantitative Finance
Volume8
Issue number1
DOIs
Publication statusPublished - 2008

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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