Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
883783 | Journal of Economic Behavior & Organization | 2012 | 17 Pages |
Generalized with the regime-dependent beliefs and regime-switching dynamics, the simple market-maker framework established by Day and Huang (1990) is capable to model all types of crises, that is, sudden crisis, disturbing crisis and smooth crisis, and to offer economic and dynamic justifications on how and why these crises appear. Moreover, the model simulations verify the salient qualitative and statistical properties commonly observed in the real financial data such as fat tails, volatility clustering, long range dependence, leverage effect and other stylized facts. Additionally, the model replicates the various chart patterns widely applied in the technical analysis.
► We generalize the simple market-maker framework established by Day and Huang (1990) with the regime-dependent beliefs and regime-switching dynamics. ► The generalized model is capable to model all types of crises, that is, sudden crisis, disturbing crisis and smooth crisis, and to offer economic and dynamic justifications on how and why these crises appear. ► The generalized model can easily replicate various chart patterns widely applied in the technical analysis. ► The numerical simulations verify the salient qualitative and statistical properties commonly observed in the real financial data such as fat tails, volatility clustering, long range dependence, leverage effect and other stylized facts.