An agent-based early warning indicator for financial market instability
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comunitat-uji-handle2:10234/8643
comunitat-uji-handle3:10234/8644
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Title
An agent-based early warning indicator for financial market instabilityDate
2019-11-21Publisher
SpringerBibliographic citation
Vidal-Tomás, David, and Simone Alfarano. "An agent-based early warning indicator for financial market instability." Journal of Economic Interaction and Coordination 15.1 (2020): 49-87.Type
info:eu-repo/semantics/articlePublisher version
https://link.springer.com/article/10.1007/s11403-019-00272-3#citeasVersion
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Abstract
Inspired by the Bank of America Merrill Lynch global breath rule, we propose an investor sentiment index based on the collective movement of stock prices in a given market. We show that the time evolution of the ... [+]
Inspired by the Bank of America Merrill Lynch global breath rule, we propose an investor sentiment index based on the collective movement of stock prices in a given market. We show that the time evolution of the sentiment index can be reasonably described by the herding model proposed by Kirman in his seminal paper “Ants, rationality and recruitment” (Kirman in Q J Econ 108:137–156, 1993). The correspondence between the index and the model allowed us to easily estimate its parameters. Based on the model and the empirical evolution of the sentiment index, we propose an early warning indicator able to identify optimistic and pessimistic phases of the market. As a result, investors and policy-makers can set different strategies anticipating financial market instability. Investors can reduce the risk of their portfolio while policy-makers can set more efficient policies to avoid the effects of financial instability on the real economy. The validity of our results is supported by means of a robustness analysis showing the application of the early warning indicator in eight different worldwide stock markets. [-]
Investigation project
Universitat Jaume I (Project UJI-B2018-77) ; the Generalitat Valenciana (Project AICO/2018/036) ; Ministerio de Ciencia Inovación y Universidades (Project RTI2018-096927-B-I00) ; Spanish Ministry of Education (Grant No. FPU2015/01434)Rights
© 2020 Springer Nature Switzerland AG. Part of Springer Nature.
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