## BERG working paper series

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#### Keywords

- Capital-Asset-Pricing Modell ; Mehragentensystem ; Volabilität ; Online-Publikation (1)
- Goods market, stock market, heterogeneous speculators, stability analysis, complex dynamics (1)
- Gütermarkt ; Aktienmarkt ; Börsenspekulation ; Dynamisches Modell ; Online-Publikation (1)
- Kreditmarkt ; Stochastisches Modell ; Online-Publikation (1)
- Kreditmarkt ; Wechselkurs ; Aktienanalyse ; Dynamisches Modell ; Online-Publikation (1)
- Method of simulated moments; moment coverage ratio; herding; discrete choice approach; transition probability approach. (1)
- Stock prices; exchange rates; market stability; technical and fundamental analysis; nonlinear market interactions; endogenous dynamics. (1)
- Structural stochastic volatility; method of simulated moments; autocorrelation pattern; fat tails; bootstrapped p-values (1)
- Wirtschaftspolitik ; Agency-Theorie ; Online-Publikation (1)
- bifurcation analysis (1)

#### Institute

- Lehrstuhl für Volkswirtschaftslehre, insbesondere Wirtschaftspolitik (43) (remove)

83

The paper proposes an elementary agent-based asset pricing model that, invoking the
two trader types of fundamentalists and chartists, comprises four features: (i) price determination
by excess demand; (ii) a herding mechanism that gives rise to a macroscopic
adjustment equation for the market fractions of the two groups; (iii) a rush towards fundamentalism
when the price misalignment becomes too large; and (iv) a stronger noise
component in the demand per chartist trader than in the demand per fundamentalist
trader, which implies a structural stochastic volatility in the returns. Combining analytical
and numerical methods, the interaction between these elements is studied in the
phase plane of the price and a majority index. In addition, the model is estimated by
the method of simulated moments, where the choice of the moments reflects the basic
stylized facts of the daily returns of a stock market index. A (parametric) bootstrap
procedure serves to set up an econometric test to evaluate the model’s goodness-of-fit,
which proves to be highly satisfactory. The bootstrap also makes sure that the estimated
structural parameters are well identified.

84

We develop a simple behavioral macro model to study interactions between the real
economy and the stock market. The real economy is represented by a Keynesian goods
market approach while the setup for the stock market includes heterogeneous speculators.
Using a mixture of analytical and numerical tools we find, for instance, that speculators may
create endogenous boom-bust dynamics in the stock market which, by spilling over into the
real economy, can cause lasting fluctuations in economic activity. However, fluctuations in
economic activity may, by shaping the firms’ fundamental values, also have an impact on
the dynamics of the stock market.

79

We develop a novel financial market model in which the stock markets of two countries
are linked via and with the foreign exchange market. To be precise, there are domestic
and foreign speculators in each of the two stock markets which rely either on linear
technical or linear fundamental trading strategies to determine their orders. Since
foreign stock market speculators require foreign currency to conduct their trades, all
three markets are connected. Our setup entails a natural nonlinearity which may cause
persistent endogenous price dynamics. Moreover, we analytically show that market
interactions can destabilize the model’s fundamental steady state.

78

In the framework of small-scale agent-based financial market models, the paper starts
out from the concept of structural stochastic volatility, which derives from different noise
levels in the demand of fundamentalists and chartists and the time-varying market shares
of the two groups. It advances several different specifications of the endogenous switching
between the trading strategies and then estimates these models by the method of simulated
moments (MSM), where the choice of the moments reflects the basic stylized facts
of the daily returns of a stock market index. In addition to the standard version of MSM
with a quadratic loss function, we also take into account how often a great number of
Monte Carlo simulation runs happen to yield moments that are all contained within their
empirical confidence intervals. The model contest along these lines reveals a strong role
for a (tamed) herding component. The quantitative performance of the winner model is
so good that it may provide a standard for future research.

68

In this paper we integrate heterogeneous inflation expectations into a simple monetary
model. Guided by empirical evidence we assume that boundedly rational agents, selecting
between extrapolative and regressive forecasting rules to predict the future inflation rate,
prefer rules that have produced low prediction errors in the past. We show that integrating
this behavioral expectation formation process into the monetary model leads to the
possibility of endogenous macroeconomic dynamics. For instance, our model replicates
certain empirical regularities such as irregular growth cycles or inflation persistence.
Moreover, we observe multi-stability via a Chenciner bifurcation.