Bull and Bear Market Regimes Within a Heterogeneous Agent Model

Abstract

This paper examines the influence of the heterogeneity of market participants on the characteristics of bull and bear markets within a heterogeneous agent model. Heterogeneity is shown to significantly contribute to the formation of distinct bull and bear regimes. Sensitivity analysis of the price dynamics furthermore reveals strong links between agent group characteristics and metrics such as the duration and amplitude of regime periods. The three most influential factors are (1) the relative strength of influence of agent groups, (2) the moving average memory parameter of trend-extrapolating agents (chartists) and (3) their sensitivity to sample variance. The reaction of market participants to recent fluctuations in return volatility appears to be an important driver of market regime asymmetry. Our findings also suggest that extrapolation of recent price movements by a group of market participants may contribute to high kurtosis in financial data.

Keywords: Heterogeneous expectations; Cycles; Market regimes; Fundamentalists; Chartists

JEL Classification: D84, E32, G12