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115
Ants, rationality, and recruitment
 Quarterly Journal of Economics
, 1993
"... This paper offers an explanation of behavior that puzzled entomologists and economists. Ants, faced with two identical food sources, were observed to concentrate more on one of these, but after a period they would turn their attention to the other. The same phenomenon has been observed in humans ch ..."
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Cited by 139 (6 self)
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This paper offers an explanation of behavior that puzzled entomologists and economists. Ants, faced with two identical food sources, were observed to concentrate more on one of these, but after a period they would turn their attention to the other. The same phenomenon has been observed in humans choosing between restaurants. After discussing the nature of foraging and recruitment behavior in ants, a simple model of stochastic recruitment is suggested. This explains the "herding " and "epidemics " described in the literature on financial markets as corresponding to the equilibrium distribution of a stochastic process rather than to switching between multiple equilibria. In a series of experiments entomologists [Deneubourg et al., 1987a; Pasteels et al., 1987a] observed that ants in an apparently symmetric situation behaved, collectively, in an asymmetric way. When faced with two identical food sources, the ants exploited one more intensively than the other. Furthermore, from time to time they switched their attention to the source that they had previ
Behavioral Heterogeneity in Stock Prices
 JOURNAL OF ECONOMIC DYNAMICS AND CONTROL FORTHCOMING
, 2006
"... We estimate a dynamic asset pricing model characterized by heterogeneous boundedly rational agents. The fundamental value of the risky asset is publicly available to all agents, but they have different beliefs about the persistence of deviations of stock prices from the fundamental benchmark. An evo ..."
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Cited by 59 (3 self)
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We estimate a dynamic asset pricing model characterized by heterogeneous boundedly rational agents. The fundamental value of the risky asset is publicly available to all agents, but they have different beliefs about the persistence of deviations of stock prices from the fundamental benchmark. An evolutionary selection mechanism based on relative past profits governs the dynamics of the fractions and switching of agents between different beliefs or forecasting strategies. A strategy attracts more agents if it performed relatively well in the recent past compared to other strategies. We estimate the model to annual US stock price data from 1871 until 2003. The estimation results support the existence of two expectation regimes, and a bootstrap Ftest rejects linearity in favor of our nonlinear twotype heterogeneous agent model. One regime can be characterized as a fundamentalists regime, because agents believe in mean reversion of stock prices toward the benchmark fundamental value. The second regime can be characterized as a chartist, trend following regime because agents expect the deviations from the fundamental to trend. The fractions of agents using the fundamentalists and trend following forecasting rules show substantial time variation and switching between predictors. The model offers an explanation for the recent stock prices runup. Before the 90s the trend following regime was active only occasionally. However, in the late 90s the trend following regime persisted and created an extraordinary deviation of stock prices from the fundamentals. Recently, the activation of the mean reversion regime has contributed to drive stock prices back closer to their fundamental valuation.
Microeconomic Models for LongMemory in the Volatility of Financial Time Series
"... We show that a class of microeconomic behavioral models with interacting agents, derived from Kirman (1991, 1993), can replicate the empirical longmemory properties of the two first conditional moments of financial time series. The essence of these models is that the forecasts and thus the desired ..."
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Cited by 58 (2 self)
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We show that a class of microeconomic behavioral models with interacting agents, derived from Kirman (1991, 1993), can replicate the empirical longmemory properties of the two first conditional moments of financial time series. The essence of these models is that the forecasts and thus the desired trades of the individuals in the markets are influenced, directly, or indirectly by those of the other participants. These "field effects" generate "herding" behaviour which affects the structure of the asset price dynamics. The series of returns generated by these models display the same empirical properties as financial returns: returns are I(0), the series of absolute and squared returns display strong dependence, while the series of absolute returns do not display a trend. Furthermore, this class of models is able to replicate the common longmemory properties in the volatility and covolatility of financial time series, revealed by Teyssière (1997, 1998a). These properties are investigated by using various model independent tests and estimators, i.e., semiparametric and nonparametric, introduced by Lo (1991), Kwiatkowski, Phillips, Schmidt and Shin (1992), Robinson (1995), Lobato and Robinson (1998), Giraitis, Kokoszka Leipus and Teyssière (2000, 2001). The relative performance of these tests and estimators for longmemory in a nonstandard data generating process is then assessed.
2008, Econometric tests of asset price bubbles: taking stock
 Journal of Economic Surveys
"... Abstract. Can asset price bubbles be detected? This survey of econometric tests of asset price bubbles shows that, despite recent advances, econometric detection of asset price bubbles cannot be achieved with a satisfactory degree of certainty. For each paper that finds evidence of bubbles, there is ..."
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Cited by 56 (0 self)
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Abstract. Can asset price bubbles be detected? This survey of econometric tests of asset price bubbles shows that, despite recent advances, econometric detection of asset price bubbles cannot be achieved with a satisfactory degree of certainty. For each paper that finds evidence of bubbles, there is another one that fits the data equally well without allowing for a bubble. We are still unable to distinguish bubbles from timevarying or regimeswitching fundamentals, while many small sample econometrics problems of bubble tests remain unresolved.
Significance of logperiodic precursors to financial crashes
, 2001
"... We clarify the status of logperiodicity associated with speculative bubbles preceding financial crashes. In particular, we address Feigenbaum’s [2001] criticism and show how it can be rebuked. Feigenbaum’s main result is as follows: “the hypothesis that the logperiodic component is present in the ..."
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Cited by 49 (19 self)
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We clarify the status of logperiodicity associated with speculative bubbles preceding financial crashes. In particular, we address Feigenbaum’s [2001] criticism and show how it can be rebuked. Feigenbaum’s main result is as follows: “the hypothesis that the logperiodic component is present in the data cannot be rejected at the 95 % confidence level when using all the data prior to the 1987 crash; however, it can be rejected by removing the last year of data. ” (e.g., by removing 15 % of the data closest to the critical point). We stress that it is naive to analyze a critical point phenomenon, i.e., a power law divergence, reliably by removing the most important part of the data closest to the critical point. We also present the history of logperiodicity in the present context explaining its essential features and why it may be important. We offer an extension of the rational expectation bubble model for general and arbitrary riskaversion within the general stochastic discount factor theory. We suggest guidelines for using logperiodicity and explain how to develop and interpret statistical tests of logperiodicity. We discuss the issue of prediction based on our results and the evidence of outliers in the distribution of drawdowns. New statistical tests demonstrate that the 1 % to 10 % quantile of the largest events of the population of drawdowns of the Nasdaq composite index and of the Dow Jones Industrial Average index belong to a distribution significantly different from the rest of the population. This suggests that very large drawdowns result from an amplification mechanism that may make them more predictable than smaller market moves.
Detecting periodically collapsing bubbles: a Markovswitching unit root test
 Journal of Applied Econometrics
, 1999
"... This paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals. As this is essentially a problem of identifying the col ..."
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Cited by 41 (0 self)
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This paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals. As this is essentially a problem of identifying the collapsing periods from the expanding ones, we propose using a generalization of the Dickey–Fuller test procedure which makes use of the class of Markov regimeswitching models. The potential of the new methodology is illustrated via simulation, and an empirical example is given. Copyright # 1999 John Wiley & Sons, Ltd. 1.
On Rational Bubbles and Fat Tails
 Journal of Money, Credit, and Banking
, 2002
"... Abstract: This paper addresses the statistical properties of time series driven by rational bubbles à la Blanchard and Watson (1982). Using insights on the behavior of multiplicative stochastic processes, we demonstrate that the tails of the unconditional distribution emerging from such bubble proce ..."
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Cited by 36 (12 self)
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Abstract: This paper addresses the statistical properties of time series driven by rational bubbles à la Blanchard and Watson (1982). Using insights on the behavior of multiplicative stochastic processes, we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow powerlaws (exhibit hyperbolic decline). More precisely, we find that rational bubbles predict a ‘fat ’ power tail for both the bubble component and price differences with an exponent m smaller than 1. The distribution of returns is dominated by the same powerlaw over an extended range of large returns. Although powerlaw tails are a pervasive feature of empirical data, these numerical predictions are in disagreement with the usual empirical estimates. It, therefore, appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level.
Explosive Behavior in the 1990s Nasdaq: When Did Exuberance Escalate Asset Values?
, 2009
"... A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, datestamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a rightside u ..."
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Cited by 35 (15 self)
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A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, datestamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a rightside unit root test and a sup test, both of which are easy to use in practical applications, and some new limit theory for mildly explosive processes. The test procedure is shown to have discriminatory power in detecting periodically collapsing bubbles, thereby overcoming a weakness in earlier applications of unit root tests for economic bubbles. An empirical application to Nasdaq stock price index in the 1990s provides confirmation of explosiveness and datestamps the origination of financial exuberance to mid1995, prior to the famous remark in December 1996 by Alan Greenspan about irrational exuberance in financial
Abstract Efficient market hypothesis and forecasting
"... The efficient market hypothesis gives rise to forecasting tests that mirror those adopted when testing the optimality of a forecast in the context of a given information set. However, there are also important differences arising from the fact that market efficiency tests rely on establishing profita ..."
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Cited by 35 (0 self)
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The efficient market hypothesis gives rise to forecasting tests that mirror those adopted when testing the optimality of a forecast in the context of a given information set. However, there are also important differences arising from the fact that market efficiency tests rely on establishing profitable trading opportunities in ‘real time’. Forecasters constantly search for predictable patterns and affect prices when they attempt to exploit trading opportunities. Stable forecasting patterns are therefore unlikely to persist for long periods of time and will selfdestruct when discovered by a large number of investors. This gives rise to nonstationarities in the time series of financial returns and complicates both formal tests of market efficiency and the search for successful forecasting approaches.
Dating the Timeline of Financial Bubbles During the Subprime Crisis
, 2009
"... A recursive regression methodology is used to analyze the bubble characteristics of various financial time series during the subprime crisis. The methods provide a technology for identifying bubble behavior and consistent dating of their origination and collapse. Seven relevant financial series are ..."
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Cited by 33 (12 self)
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A recursive regression methodology is used to analyze the bubble characteristics of various financial time series during the subprime crisis. The methods provide a technology for identifying bubble behavior and consistent dating of their origination and collapse. Seven relevant financial series are investigated, including three financial assets (the Nasdaq index, home price index and assetbacked commercial paper), two commodities (the crude oil price and platinum