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

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  • Alan P. Kirman, Gilles Teyssiere

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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Bibliographic 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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Keywords: long-memory; microeconomic models; field effects;

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