Herding, trend chasing and market volatility

Corrado Di Guilmi, Xue Zhong He*, Kai Li

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)


We introduce a heterogeneous agent asset pricing model in continuous-time to show that, although trend chasing, switching and herding all contribute to market volatility in price and return and to volatility clustering, their impacts are different. The fluctuations of the market price and return and the level of the significant autocorrelations (ACs) of the absolute and squared returns increase with the intensities of herding and trend chasing based on long time horizon. However an increase in switching intensity reduces the return volatility and in particular a low switching intensity reduces the price volatility and increases the level of the significant ACs, but the effect becomes opposite when the switching intensity is high. We also show that market noise plays a more important role than fundamental noise on the power-law behavior of returns.

Original languageEnglish
Pages (from-to)349-373
Number of pages25
JournalJournal of Economic Dynamics and Control
Publication statusPublished - 1 Nov 2014
Externally publishedYes


  • Herding
  • Heterogeneous beliefs
  • Stability
  • Stochastic delay differential equations
  • Switching
  • Volatility


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