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Microeconomic Models for Long-Memory in the Volatility of Financial Time Series

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Author Info
Alan P. Kirman, Gilles Teyssiere

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Abstract

We show that a class of microeconomic behavioral models with interacting agents, introduced by Kirman (1991,1993), can replicate the empirical long-memory properties of the two first conditional moments of financial time series. The essence of these models is that the forecasts and thus the desired trades of individuals are influenced, directly or indirectly by those of the other participants. These "field effects" generate herding behaviour which affects the structure of the asset price dynamics. The series of squared returns and absolute returns generated by these models display long-memory, while the returns are uncorrelated. Furthermore, this class of modesl is also able to replicate the common long-memory properties in the volatility and co-volatility of financial time-series uncovered by Teyssiere (1997,1998). These properties are investigated by using various semiparametric and non-parametric tests and estimators.

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Publisher Info
Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 221.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:221

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Related research
Keywords: long-memory; microeconomic models; field effects;

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

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  1. Carl Chiarella & Mauro Gallegati & Roberto Leombruni & Antonio Palestrini, 2003. "Asset Price Dynamics among Heterogeneous Interacting Agents," Computational Economics, Springer, vol. 22(2), pages 213-223, October. [Downloadable!] (restricted)
    Other versions:
  2. Christian Conrad & Menelaos Karanasos & Ning Zeng, 2008. "Multivariate Fractionally Integrated APARCH Modeling of Stock Market Volatility: A multi-country study," Working Papers 0472, University of Heidelberg, Department of Economics, revised Jul 2008. [Downloadable!]
  3. Carl Chiarella & Giulia Iori & Josep Perello, 2007. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Quantitative Finance Papers 0711.3581, arXiv.org. [Downloadable!]
    Other versions:
  4. Jonathan Dark, 2004. "Bivariate error correction FIGARCH and FIAPARCH models on the Australian All Ordinaries Index and its SPI futures," Monash Econometrics and Business Statistics Working Papers 4/04, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  5. Jonathan Dark, 2004. "Long memory in the volatility of the Australian All Ordinaries Index and the Share Price Index futures," Monash Econometrics and Business Statistics Working Papers 5/04, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  6. G. Teyssiere, . "Long-Memory Analysis," Sonderforschungsbereich 373 2000-57, Humboldt Universitaet Berlin.
  7. Thomas Lux, 2008. "Stochastic Behavioral Asset Pricing Models and the Stylized Facts," Kiel Working Papers 1426, Kiel Institute for the World Economy. [Downloadable!]
  8. Paul De Grauwe & Pablo Rovira Kaltwasser, 2006. "A Behavioral Finance Model of the Exchange Rate with Many Forecasting Rules," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  9. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
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  10. Paul De Grauwe & Pablo Rovira Kaltwasser, 2007. "Modeling Optimism and Pessimism in the Foreign Exchange Market," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Lux, Thomas, 2008. "Stochastic behavioral asset pricing models and the stylized facts," Economics Working Papers 2008,08, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
  12. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Springer, vol. 26(1), pages 19-49, August. [Downloadable!] (restricted)
  13. repec:att:wimass:192017 is not listed on IDEAS
  14. Alfarano, Simone & Lux, Thomas & Wagner, Friedrich, 2005. "Time-variation of higher moments in a financial market with heterogeneous agents : an analytical approach," Economics Working Papers 2005,14, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
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  15. Alfarano, Simone & Lux, Thomas, 2003. "A minimal noise trader model with realistic time series properties," Economics Working Papers 2003,15, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
    Other versions:
  16. Gaunersdorfer, A. & Hommes, C.H.,, 2005. "A nonlinear structural model for volatility clustering," CeNDEF Working Papers 05-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
    Other versions:
  17. TEYSSIERE, Gilles, 2003. "Interaction models for common long-range dependence in asset price volatilities," CORE Discussion Papers 2003026, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  18. Hommes, C.H.,, 2005. "Heterogeneous Agents Models: two simple examples, forthcoming In: Lines, M. (ed.) Nonlinear Dynamical Systems in Economics, CISM Courses and Lectures, Springer, 2005, pp.131-164," CeNDEF Working Papers 05-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
  19. repec:bep:sndecm:11:2007:2:1411-1411 is not listed on IDEAS
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  20. Alfarano, Simone & Lux, Thomas, 2005. "A noise trader model as a generator of apparent financial power laws and long memory," Economics Working Papers 2005,13, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
    Other versions:
  21. De Grauwe, Paul & Grimaldi, Marianna, 2004. "Exchange Rate Puzzles: A Tale of Switching Attractors," Working Paper Series 163, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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