Alfarano, Simone, Lux, Thomas, 1962- and Wagner, F. (Friedrich) (2005) Time-variation of higher moments in a financial market with heterogeneous agents: an analytical approach. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

A growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets. More and more, this literature has been concerned with the explanation of some of the stylized facts of financial markets. It now seems that some previously mysterious time-series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the interaction among different groups of speculative traders. However, most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions. In this paper, this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by Kirman [1993]. Embedding the herding framework into a simple equilibrium asset pricing model, we are able to derive closed-form solutions for the time-variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series.

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):	Time-series analysis, Rational expectations (Economic theory), Stocks -- Rate of return, Assets (Accounting), Equilibrium (Economics)
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	16 August 2005
Number:	No.05-
Number of Pages:	40
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/1779

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