Why a Simple Herding Model May Generate the Stylized Facts of Daily Returns: Explanation and Estimation

Professorship/Faculty: Economic Policy  
Authors: Westerhoff, Frank H.  ; Franke, Reiner
metadata.dc.contributor.contributor: Stübben, Felix
Corporate Body: BERG (Bamberg Economic Research Group)
Publisher Information: Bamberg : opus
Year of publication: 2012
Pages / Size: 33 S. : graph. Darst.
ISBN: 978-3-931052-93-5
Series ; Volume: BERG working paper series  ; 83
Source/Other editions: zuerst erschienen im BERG-Verlag, 2011
Year of first publication: 2011
Language(s): English
Licence: German Act on Copyright 
URN: urn:nbn:de:bvb:473-opus4-24194
Document Type: Workingpaper
The paper proposes an elementary agent-based asset pricing model that, invoking the
two trader types of fundamentalists and chartists, comprises four features: (i) price determination
by excess demand; (ii) a herding mechanism that gives rise to a macroscopic
adjustment equation for the market fractions of the two groups; (iii) a rush towards fundamentalism
when the price misalignment becomes too large; and (iv) a stronger noise
component in the demand per chartist trader than in the demand per fundamentalist
trader, which implies a structural stochastic volatility in the returns. Combining analytical
and numerical methods, the interaction between these elements is studied in the
phase plane of the price and a majority index. In addition, the model is estimated by
the method of simulated moments, where the choice of the moments reflects the basic
stylized facts of the daily returns of a stock market index. A (parametric) bootstrap
procedure serves to set up an econometric test to evaluate the model’s goodness-of-fit,
which proves to be highly satisfactory. The bootstrap also makes sure that the estimated
structural parameters are well identified.
SWD Keywords: Capital-Asset-Pricing Modell ; Mehragentensystem ; Volabilität ; Online-Publikation
Keywords: Structural stochastic volatility; method of simulated moments; autocorrelation pattern; fat tails; bootstrapped p-values
DDC Classification: 330 Economics 
RVK Classification: QK 622   
URI: https://fis.uni-bamberg.de/handle/uniba/1032
Release Date: 18. December 2012

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