A dynamic analysis of moving average rules
The use of various moving average (MA) rules remains popular with financial marketpractitioners. These rules have recently become the focus of a number empirical studies, butthere have been very few studies of financial market models where some agents employtechnical trading rules of the type used in practice. In this paper, we propose a dynamicfinancial market model in which demand for traded assets has both a fundamentalist and achartist component. The chartist demand is governedby the difference between current priceand a (long-run) MA. Both types of traders are boundedly rational in the sense that, based ona fitness measure such as realized capital gains,traders switch from a strategy with low fitnessto the one with high fitness. We characterize the stability and bifurcation properties ofthe underlying deterministic model via the reaction coefficient of the fundamentalists, theextrapolation rate of the chartists and the lag length used for the MA. By increasing theintensity of choice to switching strategies. We then examine various rational routes torandomness for different MA rules.The price dynamics of the MA rule are also examined andone of our main findings is that an increase of the window length of the MA rule can destabilize an otherwise stable system, leading to more complicated,even chaotic behaviour.The analysis of the corresponding stochastic model is able to explain various market pricephenomena,including temporary bubbles, sudden market crashes,price resistance and priceswitching between different levels.
Year of publication: |
2006
|
---|---|
Authors: | He Xuezhong ; Chiarella Carl ; Hommes Cars |
Publisher: |
Elsevier Science |
Saved in:
freely available
Saved in favorites
Similar items by person
-
A behavioral asset pricing model with a time-varying second moment
He Xuezhong, (2005)
-
Asset Price and Wealth Dynamics Under Heterogeneous Expectations
Chiarella Carl, (2003)
-
Heterogeneous beliefs, risk and learning in a simple asset pricing model
He Xuezhong, (2007)
- More ...