Impact of different investment horizons in heterogeneous agent models: Do long-term traders bring market stability?

This study incorporates the difference in agents’ investment horizons into the heterogeneous agent model developed by Brock and Hommes (1998). It shows that the effect of a longer investment horizon appears as a reduction in the fraction of the strategy adopted by long-term traders under the assumption of no autocorrelation among the excess returns on the asset. Specifically, it considers the case where long-term traders are fundamentalists and short-term traders are technical analysts. In this case, the main result obtained by Brock and Hommes (1998) that an increase in the intensity of choice to switch predictors can lead to market instability is robust provided that short-term traders bear lower costs than long-term traders. Furthermore, when short-term traders bear no costs, long-term trading by fundamentalists destabilizes the market in the sense that the pitchfork or the period doubling bifurcation value of the intensity of choice decreases compared with the corresponding values in Brock and Hommes (1998).