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Artificial Long Memory Effects in Two Agend-Based Asset Pricing Models

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  • Franke, Reiner
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    Abstract

    This note is concerned with two recent agent-based models of speculative dynamics from the literature, one by Gaunersdorfer and Hommes and the other by He and Li. At short as well as long lags, both of them display an autocorrelation structure in absolute and squared returns that comes remarkably close to that of real data at a daily frequency. The note argues that these long memory effects are to be ascribed to the stochastic specification of the price equation, which given the wide fluctuations in these models unduly fails to normalize the price shocks. Under an appropriate respecification, the long memory completely disappears. --

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    Bibliographic Info

    Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2008,15.

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    Date of creation: 2008
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    Handle: RePEc:zbw:cauewp:7368

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    Keywords: Volatility clustering; Autocorrelations of returns; Fundamentalists and trendfollowers;

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    1. He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(10), pages 3396-3426, October.
    2. Franke, Reiner, 2008. "On the Interpretation of Price Adjustments and Demand in Asset Pricing Models with Mean-Variance Optimization," Economics Working Papers 2008,13, Christian-Albrechts-University of Kiel, Department of Economics.
    3. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Society for Computational Economics, Society for Computational Economics, vol. 26(1), pages 19-49, August.
    4. Gaunersdorfer, A. & Hommes, C.H., 2000. "A Nonlinear Structural Model for Volatility Clustering," CeNDEF Working Papers 00-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    5. Manzan, S. & Westerhoff, F., 2002. "Representativeness of News and Exchange Rate Dynamics," CeNDEF Working Papers 02-13, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    6. Amilon, Henrik, 2008. "Estimation of an adaptive stock market model with heterogeneous agents," Journal of Empirical Finance, Elsevier, Elsevier, vol. 15(2), pages 342-362, March.
    7. Beja, Avraham & Goldman, M Barry, 1980. " On the Dynamic Behavior of Prices in Disequilibrium," Journal of Finance, American Finance Association, American Finance Association, vol. 35(2), pages 235-48, May.
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