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<p>We develop an asset market participation model in which investors base their market entry decisions on the momentum, value and risk of the market. Despite our behavioral framework, the model’s fundamental steady state is characterized by standard present-value relations between expected future payouts and the model-implied risk-adjusted return. We derive conditions under which endogenous asset market participation waves and co-evolving boom–bust cycles emerge. Moreover, we show that the asset market may display spontaneous, sharp, and permanent downturns if investors react sensitively to risk, an outcome that goes hand in hand with low asset market participation rates and excess volatility.</p>

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Boom–bust cycles and asset market participation waves: Momentum, value, risk, and herding

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2025年5月27日

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  • Roberto Dieci,
  • Noemi Schmitt,
  • Frank Westerhoff

摘要

We develop an asset market participation model in which investors base their market entry decisions on the momentum, value and risk of the market. Despite our behavioral framework, the model’s fundamental steady state is characterized by standard present-value relations between expected future payouts and the model-implied risk-adjusted return. We derive conditions under which endogenous asset market participation waves and co-evolving boom–bust cycles emerge. Moreover, we show that the asset market may display spontaneous, sharp, and permanent downturns if investors react sensitively to risk, an outcome that goes hand in hand with low asset market participation rates and excess volatility.