Herding, Trend Chasing and Market Volatility

43 Pages Posted: 6 Mar 2014

See all articles by Corrado Di Guilmi

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Kai Li

Macquarie Business School, Macquarie University

Date Written: September 12, 2013

Abstract

We introduce a heterogeneous agent asset pricing model in continuous-time to show that trend chasing, switching and herding all contribute to market volatility in price and return and volatility clustering, but their impact are different. On the one hand, the fluctuations of market price and return and the level of the significant autocorrelations (ACs) of the absolute and squared returns increase with herding and trend chasing based on long time horizon. On the other hand, the switching reduces the return volatility and an initial increase in switching reduces the price volatility and increases the level of the significant ACs, but the effect becomes opposite when the switching increases further. We also show that market noise plays more important role than fundamental noise on the power-law behavior.

Keywords: Heterogeneous beliefs, herding, switching, stability, volatility, stochastic delay differential equations

JEL Classification: C62, D53, D84, G12

Suggested Citation

Di Guilmi, Corrado and He, Xue-Zhong 'Tony' and Li, Kai, Herding, Trend Chasing and Market Volatility (September 12, 2013). Available at SSRN: https://ssrn.com/abstract=2400850 or http://dx.doi.org/10.2139/ssrn.2400850

Corrado Di Guilmi

University of Technology Sydney (UTS) - UTS Business School ( email )

Sydney
Australia

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

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