Time-variation of higher moments in a financial market with heterogeneous agents: An analytical approach

Simone Alfarano, Thomas Lux and Friedrich Wagner

No 2005-14, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: A growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets. More and more, this literature has been concerned with the explanation of some of the stylized facts of financial markets. It now seems that some previously mysterious time-series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the interaction among different groups of speculative traders. However, most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions. In this paper, this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by Kirman [1993]. Embedding the herding framework into a simple equilibrium asset pricing model, we are able to derive closed-form solutions for the time-variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series

Date: 2005
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Time variation of higher moments in a financial market with heterogeneous agents: An analytical approach (2008)
Working Paper: Time-variation of higher moments in a financial market with heterogeneous agents: An analytical approach (2006)
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