A Nonlinear Structural Model for Volatility Clustering

A. Gaunersdorfer () and Cars Hommes
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A. Gaunersdorfer: University of Vienna

No 00-02, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: 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 an adaptive, evolutionary dynamics according to the success of the prediction strategies in the recent past conditioned upon price deviations from the rational expectations fundamental price. Asset prices switch irregularly between two different regimes - close to the fundamental price fluctuations with low volatility, and periods of persistent deviations from fundamentals where the market is dominated by technical trading - thus, creating time varying volatility similar to that observed in real financial data.

Date: 2000
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Citations: View citations in EconPapers (47)

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Related works:
Chapter: A Nonlinear Structural Model for Volatility Clustering (2007)
Working Paper: A nonlinear structural model for volatility clustering (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:00-02

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