Computational Economics

, Volume 38, Issue 1, pp 53–83

Estimation of a Structural Stochastic Volatility Model of Asset Pricing

Authors

    • University of Kiel
  • Frank Westerhoff
    • University of Bamberg
Article

DOI: 10.1007/s10614-010-9238-7

Cite this article as:
Franke, R. & Westerhoff, F. Comput Econ (2011) 38: 53. doi:10.1007/s10614-010-9238-7

Abstract

The paper estimates an elementary agent-based financial market model recently put forward by the same authors. Invoking the two trader types of fundamentalists and chartists, it comprises four features: price determination by excess demand; a herding mechanism that gives rise to a macroscopic adjustment equation for the population shares of the two groups; a rush towards fundamentalism when the price misalignment becomes too large; and, finally, differently strong noise components in the demand per chartist and fundamentalist trader, which implies a structural stochastic volatility in the returns. The estimation is performed using the method of simulated moments. Combining it with bootstrap and Monte Carlo methods, it is found that the model cannot be rejected by the empirical daily returns from a stock market index and a foreign exchange rate. Measures of the matching of the single moments are satisfactory, too, while the behavioural parameters are well identified and are able to discriminate between the two markets.

Keywords

Stochastic volatility Method of simulated moments Daily returns Autocorrelation patterns Fundamentalist and technical trading

JEL Classification

D84 G12 G14 G15

Copyright information

© Springer Science+Business Media, LLC. 2010