Microfounding GARCH models and beyond: a Kyle-inspired model with adaptive agents
Michele Vodret (),
Bence Tóth and
Additional contact information
Michele Vodret: Ecole polytechnique
Iacopo Mastromatteo: Ecole polytechnique
Bence Tóth: Ecole polytechnique
Michael Benzaquen: Ecole polytechnique
Journal of Economic Interaction and Coordination, 2023, vol. 18, issue 3, No 6, 599-625
Abstract We relax the strong rationality assumption for the agents in the paradigmatic Kyle model of price formation, thereby reconciling the framework of asymmetrically informed traders with the Adaptive Market Hypothesis, where agents use inductive rather than deductive reasoning. Building on these ideas, we propose a stylised model able to account parsimoniously for a rich phenomenology, ranging from excess volatility to volatility clustering. While characterizing the excess-volatility dynamics, we provide a microfoundation for GARCH models. Volatility clustering is shown to be related to the self-excited dynamics induced by traders’ behavior, and does not rely on clustered fundamental innovations. Finally, we propose an extension able to account for the fragile dynamics exhibited by real markets during flash crashes.
Keywords: Adaptive agents; Volatility clustering; Excess volatility; Price impact (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1007/s11403-023-00379-8 Abstract (text/html)
Access to the full text of the articles in this series is restricted.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:spr:jeicoo:v:18:y:2023:i:3:d:10.1007_s11403-023-00379-8
Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/11403/PS2
Access Statistics for this article
Journal of Economic Interaction and Coordination is currently edited by A. Namatame, Thomas Lux and Shu-Heng Chen
More articles in Journal of Economic Interaction and Coordination from Springer, Society for Economic Science with Heterogeneous Interacting Agents Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().