How Market Intervention Can Prevent Bubbles and Crashes

Rebecca Westphal, D. Sornette
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Abstract

Using an agent-based model (ABM) with fundamentalists and chartists, prone to develop bubbles and crashes, we demonstrate the usefulness of direct market intervention by a policy maker, documenting strong performance in preventing bubbles and drawdowns and augmenting significantly the welfare of all investors. In our ABM, the policy maker diagnoses burgeoning bubbles by forming an expectation of the future return of the risky asset in the form of an exponential moving average of the excess return over the long-term return. The policy maker invests in the risky asset when he detects a small deviation of the return from the long-term growth rate in order to construct an inventory that he draws upon later to fight future market exuberance. Then, when this deviation between the current growth rate and the long-term growth rate exceeds the policy maker's tolerance level, he starts to sell the risky asset that he has accumulated earlier, in a countercyclical fight against future price increase. We find that the policy maker succeeds in preventing bubbles and crashes in our ABM. In simulations without bubbles, the policy maker behaves similarly to the fundamentalists and his impact is negligible, following the principle of "Primum non nocere". In simulations where bubbles form spontaneously as a result of the noise traders's strategies, the policy maker's intervention reduces the average drawdown by a factor of two when his market impact becomes significant. We find that the policy maker intervention improves all analysed metrics of market returns, including volatility, skewness, kurtosis and VaR, making the market less turbulent and more stable. The combination of fewer bubbles and crashes, lower market risks and the stability of the long-term growth rate make the policy maker intervention to improve the welfare of all investors as measured by their risk-adjusted return, increasing the Sharpe ratios from approximately 0.3 to 0.5 for noise traders, from 0.6 to 0.8 for fundamentalists as the market impact of the policy maker increases to the level of the fundamentalists. We also test the sensitivity of these results to variations of the key parameters of the strategy of the policy maker and find very robust outcomes. In particular, the conclusions are unchanged even under very large miscalibrated long-term expected returns of the risky asset.
市场干预如何防止泡沫和崩溃
使用一个基于主体的模型(ABM)与基本面和图表,倾向于发展泡沫和崩溃,我们证明了政策制定者直接市场干预的有用性,记录了在防止泡沫和下跌方面的强劲表现,并显着增加了所有投资者的福利。在我们的ABM中,政策制定者通过形成对风险资产未来回报的预期,以超额回报对长期回报的指数移动平均的形式,来诊断新兴的泡沫。当政策制定者发现回报与长期增长率有微小偏差时,他就会投资风险资产,以便建立一个清单,以便以后利用它来对抗未来的市场繁荣。然后,当当前增长率与长期增长率之间的偏差超过政策制定者的容忍水平时,他开始出售他之前积累的风险资产,以对抗未来价格上涨的逆周期斗争。我们发现,在我们的ABM中,政策制定者成功地防止了泡沫和崩溃。在没有泡沫的模拟中,政策制定者的行为与原教旨主义者类似,他的影响可以忽略不计,因为他遵循“首要不干预”的原则。在模拟中,泡沫是由噪音交易者的策略自发形成的,当政策制定者的市场影响变得显著时,他的干预将平均下跌幅度降低了两倍。我们发现,政策制定者的干预改善了市场回报的所有分析指标,包括波动性、偏度、峰度和VaR,使市场动荡减少,更加稳定。更少的泡沫和崩溃,更低的市场风险和长期增长率的稳定性使得政策制定者的干预以提高所有投资者的福利(以风险调整后的回报衡量),使噪音交易者的夏普比率从大约0.3提高到0.5,使基本面主义者的夏普比率从0.6提高到0.8,因为政策制定者的市场影响增加到基本面主义者的水平。我们还测试了这些结果对政策制定者战略关键参数变化的敏感性,并发现了非常稳健的结果。特别是,即使在风险资产的长期预期回报率非常大的情况下,结论也不会改变。
本文章由计算机程序翻译,如有差异,请以英文原文为准。
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