Time-variation of higher moments in a financial market with heterogeneous agents: An analytical approach
AbstractA growing body of recent literature allows for heterogenous trading strategies and limited rationality of agents in behavioral models of financial markets. More and more, this literature has been concerned with the explanation of some of the stylized facts of financial markets. It now seems that some previously mysterious time-series characteristics like fat tails of returns and temporal dependence of volatility can be observed in many of these models as macroscopic patterns resulting from the assumed interaction of speculative traders. However, most of the available evidence stems from simulation studies of relatively complicated models which do not allow for analytical solutions. In this paper, this line of research is supplemented by analytical solutions of a simple variant of the seminal herding model introduced by Kirman (1993). Embedding the herding framework into a simple equilibrium asset pricing framework, we are able to derive closed-form solutions for the time-variation of higher moments as well as related quantities of interest enabling us to spell out under what circumstances the model gives rise to realistic behavior of the resulting time series. --
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Bibliographic InfoPaper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2006,16.
Date of creation: 2006
Date of revision:
Other versions of this item:
- Alfarano, Simone & Lux, Thomas & Wagner, Friedrich, 2008. "Time variation of higher moments in a financial market with heterogeneous agents: An analytical approach," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 101-136, January.
- 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.
- Friedrich Wagner & Thomas Lux & Simone Alfarano, 2005. "Time-Variation of Higher Moments in a Financial Market with Heterogeneous Agents: An Analytical Approach," Working Papers wp05-02, Warwick Business School, Finance Group.
- NEP-ALL-2007-01-14 (All new papers)
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