This study analyses the information diffusion between Chinese A shares (restricted to domestic investors) and B shares (restricted to foreign investors). The results show that there is an important long-run information diffusion between A and B shares. In the Shanghai stock market, information flows from foreign to domestic investors. However, in the smaller and less liquid Shenzhen stock marke...

Drawing on recent advances in the study of reference dependent utility we model financial markets as a coordination game with multiple equilibria. Asset valuations may change endogenously through re-coordination which induces fluctuations in output. These fluctuations are shown to be quantitatively relevant and inefficient. JEL-Classification: G12 Acknowledgements: I am grateful to Roger Farmer...

Recent research has documented that learning and evolution are capable of generating many well known features in financial times series. We extend the results of LeBaron & Yamamoto (2007) to explore the impact of varying amounts of imitation and agent learning in a simple order driven market. We show that in our framework, imitation is critical to the generation of long memory persistence in ma...

We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. In the model, synchronization effects, which generate large fluctuations in returns, can arise purely from communication and imitation among traders. The key element in the model is the introduction of a trade friction which, by responding to price movements, creates a...

The equity premium puzzle shows that using standard parameters and setup, the Consumption-based Capital Asset Pricing Model’s (CCAPM’s) prediction of the premium associated with systematic risk is out by an order of magnitude. The object of this paper is to consider the implications of each of the broad classes of explanations of the equity premium puzzle for resource allocation, welfare and po...

We study price formation in securities markets, using the sequential trade framework of Glosten and Milgrom (1985). This paper makes one basic methodological advance over previous research on sequential securities trading: we allow traders to choose from n trade sizes in a multi-period market, where n can be arbitrarily large. We examine how trade size multiplicity affects the intertemporal dyn...

We propose a direct and robust method for quantifying the variance risk premium on financial assets. We theoretically and numerically show that the risk-neutral expected value of the return variance, also known as the variance swap rate, is well approximated by the value of a particular portfolio of options. Ignoring the small approximation error, the difference between the realized variance an...

A univariate real-valued function is said to be completely monotone if it takes positive values and alternate the signs of its higher order derivatives, starting from everywhere negative first derivatives. We prove that the representative consumer’s discount factor of a continuous-time economy under uncertainty is a power function of some completely monotone function of time satisfying certain ...

A central challenge in asset pricing is the weak connection between stock returns and observable economic fundamentals. We provide evidence that this connection is stronger than previously thought. We use a modified version of the Bry-Boschan algorithm to identify long-run swings in the stock market. We call these swings long-run bull and bear episodes. We find that there is a high correlation ...

In this paper we examine whether past returns of the market portfolio (MKT), the size portfolio (SMB), the book-to-market portfolio (HML) and the idiosyncratic volatility portfolio (HIMLI) can predict growth rates of ten major Australian economic indicators from 1993 to 2010. We find that all four factors can be used to predict growth rates in Australian economic indicators. We also find high r...