Rational Speculators, Contrarians and Excess Volatility

Management Science, 61,1889-1901, (2015)

34 Pages Posted: 30 Dec 2012 Last revised: 2 Sep 2018

Date Written: January 31, 2014


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.

Keywords: asset pricing, heterogeneous agents, VAR approach

JEL Classification: C58, D84, G11

Suggested Citation

Lof, Matthijs, Rational Speculators, Contrarians and Excess Volatility (January 31, 2014). Management Science, 61,1889-1901, (2015) , Available at SSRN: https://ssrn.com/abstract=2194792 or http://dx.doi.org/10.2139/ssrn.2194792

Matthijs Lof (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101

HOME PAGE: http://sites.google.com/site/matthijslof/

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