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A Nonlinear Structural Model for Volatility Clustering

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  • Gaunersdorfer, A.

    ()
    (University of Vienna)

  • Hommes, C.H.

    ()
    (Universiteit van Amsterdam)

Abstract

A simple nonlinear structural model of endogenous belief heterogeneity is proposed. News about fundamentals is an IID random process, but nevertheless volatility clustering occurs as an endogenous phenomenon caused by the interaction between different types of traders, fundamentalists and technical analysts. The belief types are driven by an adaptive, evolutionary dynamics according to the success of the prediction strategies in the recent past conditioned upon price deviations from the rational expectations fundamental price. Asset prices switch irregularly between two different regimes - close to the fundamental price fluctuations with low volatility, and periods of persistent deviations from fundamentals where the market is dominated by technical trading - thus, creating time varying volatility similar to that observed in real financial data.

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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 00-02.

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Date of creation: 2000
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Handle: RePEc:ams:ndfwpp:00-02

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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References

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