Resource title

A nonlinear structural model for volatility clustering

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Resource description

A simple nonlinear structural model of endogenous belief heterogeneity is proposed. News about fundamentals is an IID random process, but nevertheless volatility clustering occurs as an endogenous phenomenon caused by the interaction between different types of traders, fundamentalists and technical analysts. The belief types are driven by an adaptive, evolutionary dynamics according to the success of the prediction strategies in the recent past conditioned upon price deviations from the rational expectations fundamental price. Asset prices switch irregularly between two different regimes -- close to the fundamental price fluctuations with low volatility, and periods of persistent deviations from fundamentals triggered by technical trading - thus, creating time varying volatility similar to that observed in real financial data. (author's abstract) ; Series: Working Papers SFB "Adaptive Information Systems and Modelling in Economics and Management Science"

Resource author

Andrea Gaunersdorfer, Cars H. Hommes

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Resource language

en

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application/pdf

Resource resource URL

http://epub.wu.ac.at/380/1/document.pdf

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Adapt according to the license agreement. Always reference the original source and author.