Teoretical and Technical Analysis of Capital Markets Heterogeneity
|Author:||Mgr. Dita Fuchsová|
|Year:||2002 - summer|
|Leaders:|| prof. Ing. Miloslav Vošvrda CSc.
|Work type:|| Financial Markets
|Awards and prizes:|
|Abstract:||The Efficient Market Hypothesis asserts that the prices of securities correctly and fully reflect all available information. But there are some facts in capital markets that EMH is not able to explain. Thus this thesis chooses an alternative model, model with heterogeneous expectations introduced by Brock and Hommes (1997), to analyze the behaviour of agents, their choice of prediction strategy and the evolution of the price. In this model agents choose their strategy among a finite number of belief functions which are function of past observation. Their choice is based on a fitness measure attached to every belief function. This leads to evolutionary dynamics across predictor choice coupled to dynamics of equilibrium prices. This model thus incorporate a general mechanism leading to local instability of steady state and to complicated dynamics. Price is then driven by endogenous forces and does not follow its rational fundamentals. This conclusion has important implications for financial markets and for the whole economy. At first, it says that fundamentalists or rational agents are not able to drive out chartists from the market. At second, as the main function of price is to alocate the financial resources among the firms these resources can not be alocated optimally when the price does not follow its fundamentals.
The second part of the thesis is devoted to estimation of number of fundamentalists in financial market.