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Modelling the spreading process of extreme risks via a simple agent-based model: Evidence from the China stock market

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  • Ji, Jingru
  • Wang, Donghua
  • Xu, Dinghai

Abstract

This paper focuses on investigating financial asset returns' extreme risks, which are defined as the negative log-returns over a certain threshold. A simple agent-based model is constructed to explain the behavior of the market traders when extreme risks occur. We consider both the volatility clustering and the heavy tail characteristics when constructing the model. Empirical study uses the China securities index 300 daily level data and applies the method of simulated moments to estimate the model parameters. The stationarity and ergodicity tests provide evidence that the proposed model is good for estimation and prediction. The goodness-of-fit measures show that our proposed model fits the empirical data well. Our estimated model performs well in out-of-sample Value-at-Risk prediction, which contributes to the risk management.

Suggested Citation

  • Ji, Jingru & Wang, Donghua & Xu, Dinghai, 2019. "Modelling the spreading process of extreme risks via a simple agent-based model: Evidence from the China stock market," Economic Modelling, Elsevier, vol. 80(C), pages 383-391.
    • Handle: RePEc:eee:ecmode:v:80:y:2019:i:c:p:383-391
    DOI: 10.1016/j.econmod.2018.11.022
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    More about this item

    Keywords

    Agent-based model; Method of simulated moments; Extreme risk; Value-at-Risk; C15; C52; G15;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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