Herding, A-synchronous Updating and Heterogeneity in Memory in a CBS

Cees Diks () and Roy van der Weide ()
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Cees Diks: Faculty of Economics and Econometrics, Universiteit van Amsterdam

No 03-103/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper considers a simple Continuous Beliefs System (CBS) toinvestigate the effects on price dynamics of several behavioralassumptions: (i) herd behaviour; (ii) a-synchronous updating ofbeliefs; and (iii) heterogeneity in time horizons (memory) amongagents. The recently introduced concept of a CBS allows one to model the co-evolution of prices and the beliefs distribution explicitly, while keeping track of the unpredictable nature of individual preferences (Diks and Van der Weide, 2003). As a benchmark model we take a simple CBS, which in a market withmany traders exhibits a random walk driven by news.Using the explicit nature of the dynamics of the CBS we show that the introduction of herding modifies the random walk to an ARIMA($0,1,1$) process, which is observationally equivalent to areduction of the number of market participants. In terms of returns the model predicts MA(1) structure with a negative coeffient. Asynchronous updating leads to an MA(1) model for returns with GARCH($1,1$) innovations, and predicts a relation between the ARCH and GARCH coefficients. Heterogeneity in memory leads to long-range dependence in returns. In the empirical section we perform a modest `reality check' concerning the predicted sign of the MA coefficient and the relation between the ARCH and GARCH coefficients for exchange rate data.

Keywords: Continuous beliefs systems; Random dynamical systems; Heterogeneity; Herding; ARIMA; GARCH; Long-range dependence (search for similar items in EconPapers)
JEL-codes: C5 D8 F31 G1 (search for similar items in EconPapers)
Date: 2003-12-19
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Journal Article: Herding, a-synchronous updating and heterogeneity in memory in a CBS (2005)
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