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Volatility under Bounded Rationality

Author

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  • Nhat Le

    (Nhat Le, Ph.D, lecturer at Faculty of Economics, Vietnam National University, HCM city, Vietnam)

Abstract

The ARCH model shares with the related literature on risk and return one common thing: the rational-expectation paradigm. In particularly, market prices should reflect investors' rational forecasts, based on the best available information. When new information arrives, the market's expectations change. Therefore, prices fluctuate. Thus, price volatility is due to information arrivals and hence, volatility can be forecast, based on the up-to-date information. However, when the available information is too complex, the rational expectation may no longer hold. Bounded rationality should be added into our frame work to study risk and return, so that, we can gain a better understanding of market volatility.

Suggested Citation

  • Nhat Le, 2009. "Volatility under Bounded Rationality," Working Papers 11, Development and Policies Research Center (DEPOCEN), Vietnam.
    • Handle: RePEc:dpc:wpaper:1109
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    More about this item

    Keywords

    Bounded rationality; Market's expectations; Volatility.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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