Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents
AbstractThe finding of clustered volatility and ARCH effects is ubiquitous in financial data. This paper presents a possible explanation of this phenomenon within a multi-agent framework of speculative activity. In the model, both chartist and fundamentalist strategies are considered with agents switching between both behavioural variants according to observed differences in pay-offs. Price changes are brought about by a market maker reacting on imbalances between demand and supply. Most of the time, a stable and efficient market results. However, its usual tranquil performance is interspersed by sudden transient phases of destabilisation. Outbreak of volatility occurs if the fraction of agents using chartist techniques surpasses a certain threshold value, but such phases are quickly brought to an end by stabilising tendencies. Formally, this pattern can be understood as an example of a new type of dynamic behaviour denoted on-off intermittency in physics literature. Statistical analysis of simulated data shows that the main stylised facts (unit roots in levels together with heteroscedasticity and leptokurtosis of returns) can be found in this artificial market.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 437.
Date of creation:
Date of revision: Jul 1998
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de
volatility clustering; interacting agents; on-off intermittency;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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