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Stock index pegging and extreme markets

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  • Dong, Xinyue
  • Ma, Rong
  • Li, Honggang

Abstract

In this paper, we design a multi-agent model to explore endogenous mechanisms that create extremes in stock markets. This study will show that when making trading decisions, if the changing trends of a stock index are taken into consideration, several stylized facts, including synchronized behavior, increased downside correlations and the leverage effect, are reproducible in the model. If reversed, these facts prove the reliability of our assumption of the microscopic mechanism in the model. We finally conclude that a market drop causes synchronized behavior and further market drops. In other words, the stock index not only represents and describes a general market assessment but can also affect market sentiment and change future market trends.

Suggested Citation

  • Dong, Xinyue & Ma, Rong & Li, Honggang, 2019. "Stock index pegging and extreme markets," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 13-21.
    • Handle: RePEc:eee:finana:v:64:y:2019:i:c:p:13-21
    DOI: 10.1016/j.irfa.2019.04.012
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