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

- 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’sThe 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.…

Institutes: | Fakultät Sozial- und Wirtschaftswissenschaften / Lehrstuhl für Volkswirtschaftslehre, insbesondere Wirtschaftspolitik |
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Author: | Reiner Franke, Frank Westerhoff |

Contributer: | Felix Stübben |

Publishing Institution: | BERG (Bamberg Economic Research Group) |

Place of publication: | Bamberg |

Publisher: | opus |

Year of publication: | 2012 |

Pages / Size: | 33 S. : graph. Darst. |

Collections (Serial Number): | BERG working paper series (83) |

Year of first publication: | 2011 |

Source/Other editions: | zuerst erschienen im BERG-Verlag, 2011 |

To order a print copy: | http://www.uni-bamberg.de/vwl/forschung/wps/ |

SWD-Keyword: | 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: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |

RVK-Classification: | QK 622 |

URN: | urn:nbn:de:bvb:473-opus4-24194 |

ISBN: | 978-3-931052-93-5 |

Document Type: | Working paper |

Language: | English |

Publishing Institution: | Otto-Friedrich-Universität Bamberg |

Release Date: | 2013/01/25 |