Time-variation of higher moments in a financial market with heterogeneous agents: an analytical approach
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. Coventry: Warwick Business School, Financial Econometrics Research Centre. (Working papers (Warwick Business School. Financial Econometrics Research Centre)).
WRAP_Alfarano_fwp05-02.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
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 . 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 of Pages:||40|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|References:||S. Alfarano. An Agent-based Stochastic Volatility Model. PhD thesis, Department of Economics, University of Kiel, 2005. In preparation. S. Alfarano and T. Lux. A noise trader model as a generator of apparent financial power laws and long memory. Macroeconomics Dynamics, 2005. in press. S. Alfarano, T. Lux, and F. Wagner. Estimation of agent-based models: the case of an asymmetric herding model. Computational Economics, 26:19–49, 2005. M. Aoki. New Approaches to Macroeconomic Modeling: Evolutionary Stochastic Dynamics, Multiple Equilibria, and Externalities as Field Effects. University Press, Cambridge, 1996. M. Aoki. Modeling Aggregate Behavior and Fluctuations in Economics. University Press, Cambridge, 2002. J. Arifovic. The behaviour of the exchange rate in the genetic algorithm and experimental economies. Journal of Political Economy, 104:510–541, 1996. W. B. Arthur, J. H. Holland, B. LeBaron, R. Palmer, and P. Tayler. Asset pricing under endogenous expectations in an artificial stock market. Economic Notes, 26: 297–330, 1997. E. Barucci. Financial Markets Theory Equilibrium, Efficiency and Information. Springer, 2003. A. Beja and M. B. Goldman. On the dynamic behavior of prices in disequilibrium. Journal of Finance, 35:235–248, 1980. D. Challet and M. Marsili. From minority game to the real markets. Physical Review E, 68:168–176, 2004. S. H. Chen and C. H. Yeh. On the emergent properties of artificial stock markets: The Efficient Market Hypothesis and the Rational Expectations Hypothesis. Journal of Economic Behavior and Organization, 49:217–239, 2002. R. H. Day and W. Huang. Bulls, bears, and market sheep. Journal of Economic Behavior and Organization, 14:299–329, 1990. P. DeGrauwe, Dewachter H, and M. J. Embrechts. Exchange Rate Theory: Chaotic Models of Foreign Exchange Market. Blackwell, Oxford, 1993. E. Egenter, T. Lux, and D. Stauffer. Finite-size effects in Monte Carlo simulations of two stock market models. Physica A,, 268:250–256, 1999. H. F¨ollmer, U. Horst, and A. Kirman. Equilibria in financial markets with heterogeneous agents: A probabilistic perspective. Journal of Mathematical Economics, 41:123–155, 2005. C. W. Gardiner. Handbook of Stochastic Methods for Physics, Chemistry and the Natural Sciences. Springer, 2003. Third edition. E. Grannen and G. Swindle. Contrarians and volatility clustering. Complex Systems, 8:75–89, 1994. U. Horst. Financial price fluctuations in a stock market model with many interacting gents. Economic Theory, 25(4):917–932, 2004. A. Kirman. Epidemics of opinion and speculative bubbles in financial markets. In M. P. Taylor, editor, Money and Financial Markets, pages 354–368. Blackwell, Cambridge, 1991. A. Kirman. Ants, rationality, and recruitment. Quarterly Journal of Economics, 108:137–156, 1993. A. Kirman and G. Teyssière. Microeconomic models for long memory in the volatility of financial time series. Studies in Nonlinear Dynamics & Econometrics, 5:137–156, 2002. B. LeBaron, W. B. Arthur, and R. Palmer. The time series properties of an artificial stock market. Journal of Economic Dynamics and Control, 23:1487–1516, 1999. M. Levy, H. Levy, and S. Solomon. A microscopic model of the stock market: Cycles, booms, and crashes. Economics Letters, 45:103–111, 1994. T. Lux. Herd behaviour, bubbles and crashes. Economic Journal, 105:881–896, 1995. T. Lux. Time variation of second moments from a noise trader/infection model. Journal of Economic Dynamics and Control, 22:1–38, 1997. T. Lux. The socio-economic dynamics of speculative markets: Interacting agents, chaos, and the fat tails of return distributions. Journal of Economic Behavior and Organization, 33:143–165, 1998. T. Lux and M. Marchesi. Scaling and criticality in a stochastic multi-agent model of a financial market. Nature, 397:498–500, 1999. T. Lux and M. Marchesi. Volatility clustering in financial markets: A microsimulation of interacting agents. International Journal of Theoretical and Applied Finance, 3:67–702, 2000. T. Lux and S. Schornstein. Genetic learning as an explanation of stylized facts of foreign exchange markets. Journal of Mathematical Economics, 41:169–196, 2005. M. O’Hara. Market Microstructure Theory. Blackwell, Cambridge, 1995. J. B. Ramsey. On the existence of macro variables and of macro relationships. Journal of Economic Behavior and Organisation, 30:275–299, 1996. N. G. Van Kampen. Stochastic processes in Physics and Chemistry. North Holland, Amsterdam, 1992. Revised edition.|
Actions (login required)