A Dynamic Analysis of Moving Average Rules

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. ABSTRACT. The use of various moving average (MA) rules remains popular with financial market practitioners. These rules have recently become the focus of a number empirical studies, but there have been very few studies of financial market models where some agents employ technical trading rules of the type used in practice. In this paper we propose a dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component. Terms of use: Documents inThe chartist demand is governed by the difference between current price and a (long-run) MA.Both types of traders are boundedly rational in the sense that, based on a fitness measure such as realized capital gains, traders switch from a strategy with low fitness to the one with high fitness.We characterize the stability and bifurcation properties of the underlying deterministic model via the reaction coefficient of the fundamentalists, the extrapolation rate of the chartists and the lag length used for the MA. By increasing the intensity of choice to switching strategies, we then examine various rational routes to randomness for different MA rules. The price dynamics of the moving average rule are also examined and one of our main findings is that an increase of the window length of the MA rule can destabilize an otherwise stable system, leading to more complicated, even chaotic behaviour. The analysis of the corresponding stochastic model is able to explain various market price phenomena, including temporary bubbles, sudden market crashes, price resistance and price switching between different levels.JEL classifications: D83, D84, E21, E32, C60.

A Dynamic Analysis of the Microstructure of Moving Average Rules in a Double Auction Market

“…A novel feature is that agents switch individually depending on their personal success. This is more general than what was presented in Chiarella et al (2006b) and in many other models where groups as a whole can switch with some probability.…”

“…The current paper falls into this category and conducts a dynamic analysis of a microstructure model of continuous double auctions based on the theoretically oriented work of Chiarella et al (2006b) (CHH model hereafter) that gave a dynamic analysis of moving average rules under the market-maker scenario. The CHH model proposes a stochastic dynamic financial-market model in which demand for traded assets has both a fundamentalist and a chartist component.…”

Modeling House Price Dynamics with Heterogeneous Speculators

“…The nonlinearity introduced via the hyperbolic tangent function can be justified in terms of chartist risk perception in the presence of very large price movements , Chiarella et al 2006. 20 The nonlinear dynamical system with fundamentalists, trend-followers and fixed market impact becomes three-dimensional (L = 1).…”

“…See, e.g. Chiarella et al (2006). 2 0 In fact, the chartist demand component in function (36) can again be written as wµ t (p t − p t−1 ), where the trend extrapolation coefficient µt is now state-dependent and attains its maximum, µ, when the trend signal |pt − pt−1| → 0, whereas µt decreases as |pt − pt−1| becomes larger.…”

Memory and Asset Pricing Models with Heterogeneous Beliefs

“…In the models that were analyzed, expectational stability guaranteed stationary dynamics in the learning economy and unbiased forecasts. Chiarella et al (2006) proposed a dynamic financial market model in which demand for traded assets had both a fundamentalist and a chartist component in the boundedly rational framework. The chartist demand was governed by the difference between current price and a (long-run) moving average.…”