Rational Speculators, Contrarians, and Excess Volatility

Abstract

The VAR approach for testing present value models is applied to a nonlinear asset pricing model with three types of agents, using historical US stock prices and dividends. Besides rational long-term investors, that value assets according to expected dividends, the model includes rational and contrarian speculators. Agents choose their regime based on evolutionary considerations. Supplementing the standard present value model with speculative agents dramatically improves the model's ability to replicate the observed market dynamics. In particular the existence of contrarians can explain some of the most volatile episodes including the 1990s bubble, suggesting this was not a rational bubble.JEL Classification: C58, D84, G11

Earnings yield and predictability in the dry bulk shipping industry

“…Following Campbell and Shiller (1988a) and Lof (2015), the series of model-implied log price-net earnings ratios, + ¤ , can be generated through the following equation (Appendix D):…”

“…13 Furthermore, for equities, the point of expansion is usually assumed to be the natural logarithm of the sample mean price-dividend ratio although, as Cochrane (2011) argues, this does not need to be the case. For instance, Lof (2015) approximates by the sample mean of the ratio…”

Investors’ behavior and dynamics of ship prices: A heterogeneous agent model

“…The agents adjust their investment according to the evolutionary selection suggested by Brock and Hommes (1998) and the fraction of each type of agent increases when its predictions outperform the other types. Lof (2015) reports that the incorporation of heterogeneous agent behavior dramatically increases the explanatory power of the Vectors Autoregression and present value model of Campbell andShiller (1987 and1988), especially in explaining some of the most volatile episodes including the 1990s bubble, which can be considered evidence against the existence of a rational bubble.…”

Heterogeneous Beliefs and Asset Price Dynamics: A Survey of Recent Evidence

“…BothBoswijk et al (2007) andChiarella et al (2014) find support for mean reversion in fundamentalists' expectations and trend extrapolation in chartists' expectations of the S&P500. The model with time-varying weights has a significantly better fit than the static model Lof (2014). also estimates a heterogeneous agent model on S&P500 data.…”