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Estimating Behavioural Heterogeneity Under Regime Switching

  • Carl Chiarella

    (Finance Discipline Group, UTS Business School, University of Technology, Sydney)

  • Xue-Zhong He

    ()

    (Finance Discipline Group, UTS Business School, University of Technology, Sydney)

  • Weihong Huang

    (Division of Economics, Nanyang Technological University)

  • Huanhuan Zheng

Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and chartists with Markov chain regime-dependent expectations and applying S&P500 data from January 2000 to June 2010, we show that the estimation of the model matches well with the boom and bust periods in the US stock market. In addition, we find evidence of time-varying behavioural heterogeneity within-group and that the model exhibits good forecasting accuracy.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp290.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 290.

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Length: 32 pages
Date of creation: 01 May 2011
Date of revision:
Publication status: Published as: Chiarella, C., He, X., Huang, W. and Zheng, H., 2012, "Estimating Behavioural Heterogeneity Under Regime Switching", Journal of Economic Behavior and Organization, 83(3), 446-460.
Handle: RePEc:uts:rpaper:290
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