Asymmetric returns, gradual bubbles and sudden crashes

• Published in: The European journal of finance 2013-05, Vol.19 (5), p.420-437
• Main Authors: Huang, Weihong, Zheng, Huanhuan, Chia, Wai-Mun
• Format: Article
• Language: English
• Subjects: Agency theory; bubble; Capital market; Capital returns; crash; Dynamic models; Economic crisis; Economic dynamics; Economic models; Financial crisis; financial market; non-linear model; Non-linear models; Rates of return; return asymmetry; Securities markets; Stock market crashes; Studies
• ISSN: 1351-847X; 1466-4364
• DOI: 10.1080/1351847X.2011.606993

By applying the deterministic heterogenous agent model developed by Huang et al. [Financial crises and interacting heterogeneous agents. Journal of Economic Dynamics and Control 34, no. 6: 1105-22], this paper examines the phenomena of asymmetric returns, gradual bubbles and sudden crashes. It shows that (i) returns are asymmetric because the most positive returns initiated by fundamentalist are attenuated by the selling force of chartists, while the most negative return initiated by chartists is hardly affected by the buying force of fundamentalists; (ii) bubbles arise gradually while crashes happen suddenly as the upward price movements are counterbalanced while the downward movements are enhanced by fundamentalists. It also shows for the first time that deterministic dynamic model can simultaneously generate a wide range of stylized facts common across financial markets, including those hardly duplicated by current heterogeneous agent models, such as long-range dependence.