IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Stochastic behavioral asset pricing models and the stylized facts

  • Lux, Thomas

High-frequency financial data are characterized by a set of ubiquitous statistical properties that prevail with surprising uniformity. While these 'stylized facts' have been well-known for decades, attempts at their behavioral explanation have remained scarce. However, recently a new branch of simple stochastic models of interacting traders have been proposed that share many of the salient features of empirical data. These models draw some of their inspiration from the broader current of behavioural finance. However, their design is closer in spirit to models of multi-particle interaction in physics than to traditional asset-pricing models. This reflects a basic insight in the natural sciences that similar regularities like those observed in financial markets (denoted as 'scaling laws' in physics) can often be explained via the microscopic interactions of the constituent parts of a complex system. Since these emergent properties should be independent of the microscopic details of the system, this viewpoint advocates negligence of the details of the determination of individuals' market behavior and instead focuses on the study of a few plausible rules of behavior and the emergence of macroscopic statistical regularities in a market with a large ensemble of traders. This chapter will review the philosophy of this new approach, its various implementations, and its contribution to an explanation of the stylized facts in finance.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://econstor.eu/bitstream/10419/4310/1/EWP-2008-08.pdf
Download Restriction: no

Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2008,08.

as
in new window

Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:zbw:cauewp:7328
Contact details of provider: Postal: D-24098 Kiel,Wilhelm-Seelig-Platz 1
Phone: 0431-880 3282
Fax: 0431-880 3150
Web page: http://www.wiso.uni-kiel.de/econ/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Baillie, Richard T. & Bollerslev, Tim & Mikkelsen, Hans Ole, 1996. "Fractionally integrated generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 74(1), pages 3-30, September.
  2. Arifovic, Jasmina & Gencay, Ramazan, 2000. "Statistical properties of genetic learning in a model of exchange rate," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 981-1005, June.
  3. Gilli, M. & Winker, P., 2003. "A global optimization heuristic for estimating agent based models," Computational Statistics & Data Analysis, Elsevier, vol. 42(3), pages 299-312, March.
  4. Laurent Calvet & Adlai Fisher & Benoit Mandelbrot, 1999. "A Multifractal Model of Assets Returns," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-072, New York University, Leonard N. Stern School of Business-.
  5. repec:att:wimass:9725 is not listed on IDEAS
  6. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
  7. B. B. Mandelbrot, 2001. "Stochastic volatility, power laws and long memory," Quantitative Finance, Taylor & Francis Journals, vol. 1(6), pages 558-559.
  8. I.N. Lobato & N.E. Savin, 1996. "Real and Spurious Long Memory Properties of Stock Market Data," Econometrics 9605004, EconWPA, revised 26 Sep 1996.
  9. Beja, Avraham & Goldman, M Barry, 1980. " On the Dynamic Behavior of Prices in Disequilibrium," Journal of Finance, American Finance Association, vol. 35(2), pages 235-48, May.
  10. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," The Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July.
  11. He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3396-3426, October.
  12. KIRMAN, Alan & TEYSSIÈRE, Gilles, 2002. "Microeconomic models for long-memory in the volatility of financial time series," CORE Discussion Papers 2002056, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Gu, Mu, 1995. "Market mediating behavior: An economic analysis of the security exchange specialists," Journal of Economic Behavior & Organization, Elsevier, vol. 27(2), pages 237-256, July.
  14. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
  15. 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, vol. 26(1), pages 19-49, August.
  16. Lee, Wayne Y. & Jiang, Christine X. & Indro, Daniel C., 2002. "Stock market volatility, excess returns, and the role of investor sentiment," Journal of Banking & Finance, Elsevier, vol. 26(12), pages 2277-2299.
  17. repec:att:wimass:9625 is not listed on IDEAS
  18. 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.
  19. 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.
  20. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  21. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October.
  22. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
  23. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  24. Follmer, Hans, 1974. "Random economies with many interacting agents," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 51-62, March.
  25. Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Society for Computational Economics, vol. 19(1), pages 95-132, February.
  26. Durlauf,S.N., 2003. "Complexity and emperical economics," Working papers 2, Wisconsin Madison - Social Systems.
  27. Nicholas Barberis, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," Journal of Finance, American Finance Association, vol. 56(4), pages 1247-1292, 08.
  28. Bollerslev, Tim & Wright, Jonathan H., 2000. "Semiparametric estimation of long-memory volatility dependencies: The role of high-frequency data," Journal of Econometrics, Elsevier, vol. 98(1), pages 81-106, September.
  29. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  30. Egenter, E. & Lux, T. & Stauffer, D., 1999. "Finite-size effects in Monte Carlo simulations of two stock market models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 268(1), pages 250-256.
  31. ROCKINGER, Michael & JONDEAU, Eric, 1999. "The Tail Behavior of Stock Returns: Emerging versus Mature Markets," Les Cahiers de Recherche 668, HEC Paris.
  32. Dawid, Herbert, 1999. "On the convergence of genetic learning in a double auction market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1545-1567, September.
  33. Paolo Pellizzari & Arianna Dal Forno, 2006. "A comparison of different trading protocols in an agent-based market," Working Papers 140, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  34. Thomas Lux, 2001. "The limiting extremal behaviour of speculative returns: an analysis of intra-daily data from the Frankfurt Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 299-315.
  35. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
  36. Eugene F. Fama, . "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  37. Crato, Nuno & de Lima, Pedro J. F., 1994. "Long-range dependence in the conditional variance of stock returns," Economics Letters, Elsevier, vol. 45(3), pages 281-285.
  38. Kevin Fergusson & Eckhard Platen, 2006. "On the Distributional Characterization of Daily Log-Returns of a World Stock Index," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(1), pages 19-38.
  39. Bernd Pape, 2007. "Asset allocation and multivariate position based trading," Journal of Economic Interaction and Coordination, Springer, vol. 2(2), pages 163-193, December.
  40. Diebold, Francis X. & Inoue, Atsushi, 2001. "Long memory and regime switching," Journal of Econometrics, Elsevier, vol. 105(1), pages 131-159, November.
  41. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  42. Georges, Christophre, 2006. "Learning with misspecification in an artificial currency market," Journal of Economic Behavior & Organization, Elsevier, vol. 60(1), pages 70-84, May.
  43. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  44. Alfarano, Simone & Milaković, Mishael, 2008. "Should Network Structure Matter in Agent-Based Finance?," Economics Working Papers 2008,04, Christian-Albrechts-University of Kiel, Department of Economics.
  45. Chen, Shu-Heng & Yeh, Chia-Hsuan, 2002. "On the emergent properties of artificial stock markets: the efficient market hypothesis and the rational expectations hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 217-239, October.
  46. Granger, Clive W. J. & Ding, Zhuanxin, 1996. "Varieties of long memory models," Journal of Econometrics, Elsevier, vol. 73(1), pages 61-77, July.
  47. de Lima, Pedro J F, 1998. "Nonlinearities and Nonstationarities in Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(2), pages 227-36, April.
  48. Brock, W A, 1999. "Scaling in Economics: A Reader's Guide," Industrial and Corporate Change, Oxford University Press, vol. 8(3), pages 409-46, September.
  49. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
  50. Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-41, June.
  51. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  52. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
  53. Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
  54. Gallegati, Mauro & Keen, Steve & Lux, Thomas & Ormerod, Paul, 2006. "Worrying trends in econophysics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 1-6.
  55. De Vries, C.G. & Leuven, K.U., 1994. "Stylized Facts of Nominal Exchange Rate Returns," Papers 94-002, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
  56. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
  57. Longin, Francois M, 1996. "The Asymptotic Distribution of Extreme Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 69(3), pages 383-408, July.
  58. Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
  59. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
  60. Eugene F. Fama, 1963. "Mandelbrot and the Stable Paretian Hypothesis," The Journal of Business, University of Chicago Press, vol. 36, pages 420.
  61. Ole E. Barndorff-Nielsen & Karsten Prause, 2001. "Apparent scaling," Finance and Stochastics, Springer, vol. 5(1), pages 103-113.
  62. V. Plerou & P. Gopikrishnan & X. Gabaix & L. A. N. Amaral & H. E. Stanley, 2001. "Price fluctuations, market activity and trading volume," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 262-269.
  63. Chen, Shu-Heng & Lux, Thomas & Marchesi, Michele, 2001. "Testing for non-linear structure in an artificial financial market," Journal of Economic Behavior & Organization, Elsevier, vol. 46(3), pages 327-342, November.
  64. Vanden, Joel M., 2005. "Equilibrium analysis of volatility clustering," Journal of Empirical Finance, Elsevier, vol. 12(3), pages 374-417, June.
  65. Parameswaran Gopikrishnan & Martin Meyer & Luis A Nunes Amaral & H Eugene Stanley, 1998. "Inverse Cubic Law for the Probability Distribution of Stock Price Variations," Papers cond-mat/9803374, arXiv.org, revised May 1998.
  66. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June.
  67. Gregory W. Brown & Michael T. Cliff, 2005. "Investor Sentiment and Asset Valuation," The Journal of Business, University of Chicago Press, vol. 78(2), pages 405-440, March.
  68. Granger, C. W. J., 1980. "Long memory relationships and the aggregation of dynamic models," Journal of Econometrics, Elsevier, vol. 14(2), pages 227-238, October.
  69. Nicholas Barberis & Ming Huang, 2001. "Mental Accounting, Loss Aversion, and Individual Stock Returns," NBER Working Papers 8190, National Bureau of Economic Research, Inc.
  70. Lobato, Ignacio N & Velasco, Carlos, 2000. "Long Memory in Stock-Market Trading Volume," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(4), pages 410-27, October.
  71. A. Abhyankar & L. S. Copeland & W. Wong, 1995. "Moment condition failure in high frequency financial data: evidence from the S&P 500," Applied Economics Letters, Taylor & Francis Journals, vol. 2(8), pages 288-290.
  72. Zeeman, E. C., 1974. "On the unstable behaviour of stock exchanges," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 39-49, March.
  73. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
  74. Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
  75. Bottazzi, Giulio & Dosi, Giovanni & Rebesco, Igor, 2005. "Institutional architectures and behavioral ecologies in the dynamics of financial markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 197-228, February.
  76. P. Gopikrishnan & M. Meyer & L.A.N. Amaral & H.E. Stanley, 1998. "Inverse cubic law for the distribution of stock price variations," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 3(2), pages 139-140, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:zbw:cauewp:7328. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.