Moving average rules as a source of market instability

Chiarella, C; He, XZ; Hommes, C

Moving average rules as a source of market instability

Chiarella, C He, XZ

Hommes, C

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Publication Type:: Journal Article
Citation:: Physica A: Statistical Mechanics and its Applications, 2006, 370 (1), pp. 12 - 17
Issue Date:: 2006-10-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	He, XZ https://orcid.org/0000-0003-1446-9996	en_US
dc.contributor.author	Hommes, C	en_US
dc.date.issued	2006-10-01	en_US
dc.identifier.citation	Physica A: Statistical Mechanics and its Applications, 2006, 370 (1), pp. 12 - 17	en_US
dc.identifier.issn	0378-4371	en_US
dc.identifier.uri	http://hdl.handle.net/10453/3429
dc.description.abstract	Despite the pervasiveness of the efficient markets paradigm in the academic finance literature, the use of various moving average (MA) trading rules remains popular with financial market practitioners. This paper proposes a stochastic dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component. The chartist demand is governed by the difference between current price and a (long-run) MA. Our simulations show that the MA is a source of market instability, and the interaction of the MA and market noises can lead to the tendency for the market price to take long excursions away from the fundamental. The model reveals various market price phenomena, the coexistence of apparent market efficiency and a large chartist component, price resistance levels, long memory and skewness and kurtosis of returns. © 2006 Elsevier B.V. All rights reserved.	en_US
dc.relation	http://purl.org/au-research/grants/arc/DP0450526
dc.relation.ispartof	Physica A: Statistical Mechanics and its Applications	en_US
dc.relation.isbasedon	10.1016/j.physa.2006.04.026	en_US
dc.subject.classification	Fluids & Plasmas	en_US
dc.title	Moving average rules as a source of market instability	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	370	en_US
utslib.for	0105 Mathematical Physics	en_US
utslib.for	0102 Applied Mathematics	en_US
utslib.for	0206 Quantum Physics	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.issue	1	en_US
pubs.publication-status	Published	en_US
pubs.volume	370	en_US

Abstract:

Despite the pervasiveness of the efficient markets paradigm in the academic finance literature, the use of various moving average (MA) trading rules remains popular with financial market practitioners. This paper proposes a stochastic dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component. The chartist demand is governed by the difference between current price and a (long-run) MA. Our simulations show that the MA is a source of market instability, and the interaction of the MA and market noises can lead to the tendency for the market price to take long excursions away from the fundamental. The model reveals various market price phenomena, the coexistence of apparent market efficiency and a large chartist component, price resistance levels, long memory and skewness and kurtosis of returns. © 2006 Elsevier B.V. All rights reserved.

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http://hdl.handle.net/10453/3429