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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.