A Nonlinear Structural Model for Volatility Clustering

Andrea Gaunersdorfer () and Cars Hommes
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Andrea Gaunersdorfer: University of Vienna

A chapter in Long Memory in Economics, 2007, pp 265-288 from Springer

Abstract: Summary 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 adaptive, evolutionary dynamics according to the success of the prediction strategies as measured by accumulated realized profits, conditioned upon price deviations from the rational expectations fundamental price. Asset prices switch irregularly between two different regimes — periods of small price fluctuations and periods of large price changes triggered by random news and reinforced by technical trading — thus, creating time varying volatility similar to that observed in real financial data.

Keywords: Asset Price; Risky Asset; Asset Price Model; Return Series; Price Series (search for similar items in EconPapers)
Date: 2007
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Related works:
Working Paper: A nonlinear structural model for volatility clustering (2005)
Working Paper: A Nonlinear Structural Model for Volatility Clustering (2000)
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DOI: 10.1007/978-3-540-34625-8_9

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