On the bimodality of the distribution of the S&P 500's distortion: Empirical evidence and theoretical explanations

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. Terms of use: Documents in AbstractAfter showing that the distribution of the S&P 500's distortion, i.e. the log difference between its real stock market index and its real fundamental value, is bimodal, we demonstrate that agentbased financial market models may explain this puzzling observation. Within these models, speculators apply technical and fundamental analysis to predict asset prices. Since destabilizing technical trading dominates the market near the fundamental value, asset prices tend to be either overvalued or undervalued. Interestingly, the bimodality of the distribution of the S&P 500's distortion confirms an implicit prediction of a number of seminal agent-based financial market models.

Co-existence of trend and value in financial markets: Estimating an extended Chiarella model

“…This is a somewhat intriguing observation since it suggests that the market's most likely state is being over-priced or under-priced. This was also recently reported in Schmitt and Westerhoff (2017). We statistically confirm the bimodality of mispricing distribution by applying Silverman (1981) test.…”

“…Our extended Chiarella model comes in two versions: one where the fundamentalists' demand function is linear in the mispricing, and one where a non-linear (cubic) correction is considered. We find that, while capturing most of the phenomenology of the price dynamics, the linear model fails on several (related) counts: i) the linear model is not self-consistent as a clear non-linearity of the fundamental demand remains after calibration; ii) the fundamental value extracted from the linear model appears not to track closely enough the market price, a discrepancy partially corrected by a non-linear demand (although the variance of the mispricing is still large and compatible with Black's factor 2); iii) the distribution of mispricings is bimodal for some assets, as recently pointed out by Schmitt and Westerhoff (2017), while the distribution of trend signals remains unimodal. This feature is impossible to reproduce within a linear model but can be accommodated within the non-linear model.…”

Divergent Behavior in Markets with Idiosyncratic Private Information

“…4 Goldbaum (2006) imposes constraints consistent with a rational 2 In Brock and Hommes (1998) the fundamental value is constant but the market-based traders nonetheless extrapolate from past returns. All price innovations generated by the model are spurious, a rather extreme notion of financial market disfunctionality but one well reflected in the data presented in Shiller (2015) according to Schmitt and Westerhoff (2017b).…”

A Credibilistic Mean-Semivariance-Per Portfolio Selection Model for Latin America

“…Stock exchange investors have a variety of strategies available to allocate their wealth. Shortterm investors mainly employ technical analysis (Sobreiro et al, 2016;Zhu, Atri, & Yegen, 2016) and chartist analysis (Gerritsen, 2016;Schmitt & Westerhoff, 2017). Long-term inves-tors widely use fundamental analysis (De Oliveira, Nobre, & Zárate, 2013;Shen, Yan, & Tzeng, 2014) or passive investment strategies (García, Guijarro, & Moya, 2013;García, Guijarro, & Oliver, 2018).…”