Heterogeneous volatility cascade in financial markets

Gilles Zumbach and Paul Lynch

Physica A: Statistical Mechanics and its Applications, 2001, vol. 298, issue 3, 521-529

Abstract: Using high frequency data, we have studied empirically the change of volatility, also called volatility derivative, for various time horizons. In particular, the correlation between the volatility derivative and the volatility realized in the next time period is a measure of the response function of the market participants. This correlation shows explicitly the heterogeneous structure of the market according to the characteristic time horizons of the different agents. It reveals a volatility cascade from long to short time horizons, with a structure different from the one observed in turbulence. Moreover, we have developed a new ARCH-type model which incorporates the different groups of agents, with their characteristic memory. This model reproduces well the empirical response function, and allows us to quantify the importance of each group.

Keywords: Econophysics; Volatility cascade; Market components; ARCH model; Turbulence (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:298:y:2001:i:3:p:521-529

DOI: 10.1016/S0378-4371(01)00249-7

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