Interest Rate Changes, Trading Behaviour and Financial Stability——A Continuous-Time DSGE Model with Heterogeneous Agents and Beliefs
YAN Yu, TONG Yan, HASI Muqier, JIN Zhuang
International Business School, Beijing Foreign Studies University; School of Economics and Management, University of Chinese Academy of Sciences; School of Finance, Zhongnan University of Economics and Law; Inner Mongolia University of Finance and Economics
Summary:
The fine-tuning of monetary policy always influences the trading sentiment of investors in risk assets to some extent. The interaction between trader sentiment and financial market stability has been a focal point in financial research. However, existing studies have not provided a comprehensive understanding of this mechanism. This paper establishes a heterogeneous agent continuous-time DSGE model that incorporates heterogeneous beliefs to explore how differences in expected forms affect responses to monetary policy. By introducing heterogeneous expectations, a more thorough discussion of risk asset pricing is achieved. Specifically, investors are divided into convergent expectation traders, represented by institutional investors, and extrapolative expectation traders, characterized by algorithmic trading and momentum strategies. The price of risk assets can be expressed as an explicit expression of dividends and expectations. This paper provides an analytical solution for risk asset pricing under the assumption of heterogeneous expectations, enhancing the understanding of how prices are influenced by exogenous processes and trader expectations. The well-defined property of this equation reveals a clear relationship between risk asset prices and various exogenous processes, serving as a foundation for numerical simulations and offering significant references for future empirical asset pricing model designs. One of the key contributions of this study is the integration of stock market trading behaviors' amplification effects on monetary policy into a classic continuous-time general equilibrium model, facilitating a unified discussion of the excess volatility puzzle and financial stability. Despite the frequent continuous oscillation of risk asset prices and extensive literature examining stock price responses to monetary policy shocks, this paper presents a novel perspective based on heterogeneous beliefs within a general equilibrium framework. Numerical simulation results indicate that irrational traders who follow trends influence the effects of monetary policy shocks on financial markets. The findings show that accommodative monetary policy directly influences the movements of risk asset prices. When traders expect that monetary easing will continue, they choose to increase their investments in risk assets, resulting in a sustained upward trend in prices. During this process, extrapolative expectation traders recognize this trend, forming expectations of continued price increases and actively reallocating assets, further driving up risk asset prices. Financial market stability has long been an important research topic in economics and finance. However, the rational behaviors and equilibrium assumptions in traditional theories fail to fully explain actual market operations. Many studies demonstrate the presence of various types of investors in financial markets, particularly focusing on extrapolative expectation traders, whose behavior is primarily driven by emotions and psychological factors, deviating from rational expectations based on fundamentals and market equilibrium. This paper investigates the impact of extrapolative expectation traders on financial stability, exploring their behavioral patterns, market influences, and the potential risks and challenges they pose to financial stability. The results indicate that the pattern of behavior of extrapolative expectation traders significantly affects the stability of financial markets. This paper not only focuses on the effects of extrapolative expectations on financial markets but also examines their impact on the effects of monetary policy changes. Given the close relationship between monetary policy formulation and financial regulation in China, policymakers need to coordinate closely with regulatory bodies to craft effective policy measures. Thus, monetary policymakers must monitor the behaviors of different types of expectation traders in the market closely and take appropriate policy actions. For instance, when the market overly relies on extrapolative expectations and forms noticeable price bubbles, policymakers can adopt tighter monetary policies to curb market overheating and prevent instability. Additionally, they can enhance market transparency and efficiency through information disclosure and regulation, reducing distortions caused by information asymmetry and incompleteness. To maintain financial market stability, it is essential to strengthen both monitoring and management of extrapolative expectation traders' behaviors, improve investors' rational decision-making capabilities and risk management awareness, reinforce information disclosure and regulatory frameworks, and enhance international cooperation to collectively address these impacts, thereby improving market efficiency and stability and promoting sustainable economic development.
闫昱, 童彦, 哈斯木其尔, 金桩. 利率变动、交易行为与金融稳定——一个融合异质信念的异质代理人连续时间DSGE模型[J]. 金融研究, 2024, 534(12): 20-39.
YAN Yu, TONG Yan, HASI Muqier, JIN Zhuang. Interest Rate Changes, Trading Behaviour and Financial Stability——A Continuous-Time DSGE Model with Heterogeneous Agents and Beliefs. Journal of Financial Research, 2024, 534(12): 20-39.
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