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A simple asymmetric herding model to distinguish between stock and foreign exchange markets

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Alfarano, Simone and Franke, Reiner (2007) A simple asymmetric herding model to distinguish between stock and foreign exchange markets. Working Paper. Coventry: Warwick Business School, Financial Econometrics Research Centre. Working papers (Warwick Business School. Financial Econometrics Research Centre) (No.07-).

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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...

Abstract

Drawing on previous work of one of the authors, the paper takes an asymmetric variant of Kirman’s ant model and combines it with an elementary asset pricing mechanism. The closed-form solution of the equilibrium probability distribution allows the specification of a tractable likelihood function for daily returns, which is then employed to estimate the model’s behavioural parameters for a large pool of Japanese stocks. By way of Monte Carlo simulations it is found that most of these markets belong to the same class, which is characterized by a dominance of the stylized noise traders. In contrast, the model assigns a number of major foreign exchange markets to a different class, where on average the majority of agents follows the fundamentalist trading rule. Implications for the tail index are also worked out.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HG Finance

Divisions:

Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School

Library of Congress Subject Headings (LCSH):

Stock markets -- Mathematical models, Probabilities, Foreign exchange rates -- Mathematical models, Monte Carlo method

Series Name:

Working papers (Warwick Business School. Financial Econometrics Research Centre)

Publisher:

Warwick Business School, Financial Econometrics Research Centre

Place of Publication:

Coventry

Official Date:

May 2007

Dates:

Date	Event
May 2007	Published

Number:

No.07-

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

Funder:

Sixth Framework Programme (European Commission) (FP6)

Grant number:

516446 (SFP)

References:

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