Abstract
Heterogeneity and evolutionary behaviour of investors are two of the most
important characteristics of financial markets. This paper incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within themean-variance framework.We show that the rational behaviour of agents switching to better-performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.
important characteristics of financial markets. This paper incorporates the adaptive behaviour of agents with heterogeneous beliefs and establishes an evolutionary capital asset pricing model (ECAPM) within themean-variance framework.We show that the rational behaviour of agents switching to better-performing trading strategies can cause large deviations of the market price from the fundamental value of one asset to spill over to other assets. Also, this spill-over effect is associated with high trading volumes and persistent volatility characterized by significantly decaying autocorrelations of, and positive correlation between, price volatility and trading volume.
| Original language | English |
|---|---|
| Pages (from-to) | 185-215 |
| Number of pages | 31 |
| Journal | Annals of Finance |
| Volume | 9 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - May 2013 |
| Externally published | Yes |
Keywords
- evolutionary CAPM
- heterogeneous beliefs
- market stability
- spill-over effects
- volatility
- trading volume