Dresden 2014 – wissenschaftliches Programm

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SOE: Fachverband Physik sozio-ökonomischer Systeme

SOE 3: Financial Markets and Risk Management

SOE 3.1: Vortrag

Montag, 31. März 2014, 12:00–12:15, GÖR 226

Endogenous bubbles in an equilibrium model of rational and noise traders without strategy switching — •Matthias Leiss¹, Taisei Kaizoji², Alexander Saichev¹, and Didier Sornette¹ — ¹ETH Zurich, Switzerland — ²International Christian University, Tokyo, Japan

We introduce a model of financial bubbles with two assets (risky and risk-free), in which rational investors and noise traders co-exist. Rational investors form expectations on the return and risk of a risky asset and maximize their expected utility with respect to their allocation on the risky asset versus the risk-free asset. Noise traders are subjected to social imitation and follow momentum trading. By contrast to previous models in the field, we do not allow agents to switch between trading strategies. Allowing for random time-varying herding propensity, we are able to reproduce several stylized facts of financial markets such as a fat-tail distribution of returns, volatility clustering and transient faster-than-exponential bubble growth with approx- imate log-periodic behavior. The model accounts well for the behavior of traders and for the price dynamics that developed during the dotcom bubble in 1995-2000. Momentum strategies are shown to be transiently profitable, supporting these strategies as enhancing herding behavior.