Estimating heterogeneous agents behavior in a two-market financial system |
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Authors: | Zhenxi Chen Weihong Huang Huanhuan Zheng |
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Institution: | 1.School of Economics and Commerce,South China University of Technology,Guangzhou,China;2.Division of Economics,Nanyang Technological University,Singapore,Singapore;3.Department of Economics,The Chinese University of Hong Kong,Shatin,Hong Kong |
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Abstract: | In this paper, we propose a two-market empirical model with heterogeneous agents based on Chiarella et al. (J Econ Behav Organ 83(3):446–460, 2012). Using monthly data of French and US stock markets, the regression shows that individual markets have features of a two-regime switching process. By including inter-market traders whose trading decision is based on fundamental value of foreign market, the two-market model has a better capability in explaining both markets with domestic fundamental traders turning to be significant. The existence of inter-market traders implies that the two markets impact each other through their fundamentals and hence share some common set of factors, which provides foundation of market interactions, such as market co-movement. |
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