Volatility under Bounded Rationality

Nhat Le ()
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Nhat Le: Nhat Le, Ph.D, lecturer at Faculty of Economics, Vietnam National University, HCM city, Vietnam

No 11, Working Papers from Development and Policies Research Center (DEPOCEN), Vietnam

Abstract: The ARCH model shares with the related literature on risk and return one common thing: the rational-expectation paradigm. In particularly, market prices should reflect investors' rational forecasts, based on the best available information. When new information arrives, the market's expectations change. Therefore, prices fluctuate. Thus, price volatility is due to information arrivals and hence, volatility can be forecast, based on the up-to-date information. However, when the available information is too complex, the rational expectation may no longer hold. Bounded rationality should be added into our frame work to study risk and return, so that, we can gain a better understanding of market volatility.

Keywords: Bounded rationality; Market's expectations; Volatility. (search for similar items in EconPapers)
JEL-codes: C22 C53 G17 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2009-03
New Economics Papers: this item is included in nep-cbe and nep-upt
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