A nonlinear structural model for volatility clustering

A. Gaunersdorfer and Cars Hommes
Additional contact information
A. Gaunersdorfer: University of Vienna

No 05-02, 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 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.

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://cendef.uva.nl/binaries/content/assets/subsi ... wp.pdf?1417181157563 (application/pdf)

Related works:
Chapter: A Nonlinear Structural Model for Volatility Clustering (2007)
Working Paper: A Nonlinear Structural Model for Volatility Clustering (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:05-02

Access Statistics for this paper

More papers in CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands. Contact information at EDIRC.
Bibliographic data for series maintained by Cees C.G. Diks ().