Grafting of higher-order correlations of real financial markets into herding models

Sanghyun Ahn, Gyuchang Lim, Sooyong Kim and Kyungsik Kim

Physica A: Statistical Mechanics and its Applications, 2009, vol. 388, issue 15, 3195-3201

Abstract: In this work, we graft the volatility clustering observed in empirical financial time series into the Equiluz and Zimmermann (EZ) model, which was introduced to reproduce the herding behaviors of a financial time series. The original EZ model failed to reproduce the empirically observed power-law exponents of real financial data. The EZ model ordinarily produces a more fat-tailed distribution compared to real data, and a long-range correlation of absolute returns that underlie the volatility clustering. As it is not appropriate to capture the empirically observed correlations in a modified EZ model, we apply a sorting method to incorporate the nonlinear correlation structure of a real financial time series into the generated returns. By doing so, we observe that the slow convergence of distribution of returns is well established for returns generated from the EZ model and its modified version. It is also found that the modified EZ model leads to a less fat-tailed distribution.

Keywords: EZ model; Correlation; KOSPI; KRW-USD (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:388:y:2009:i:15:p:3195-3201

DOI: 10.1016/j.physa.2009.04.005

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