Endogenous Fundamental and Stock Cycles

A heterogeneous agent model of a financial market with endogenous fundamental value is built to study the recurrence of stock cycles. In a hypothetical economy, a firm produces consumption goods and issues a risk-free corporate bond and a risky stock in the financial market. Heterogeneous agents provide either capital or labor to the production, and they trade in the financial market by using fundamental or technical strategies. The fundamental value of the firm's stock is endogenously determined by the firm's production output. Agents' investment in the risk-free bond is reinvested into future production. Steady-state analysis shows possible economic equilibrium under a proper parameter setting. In numerical simulations, stock cycles recur, and each stock cycle consists of the following four phases: accumulation, boom, crash, and recovery. A close investigation of stock cycles shows that a prosperous stock market may accelerate the formation of bubbles by drawing resources from future production. Although chartists are less wealthy than fundamentalists, they are capable of having a significant effect on the stock market.