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Empirical validation of simulated models through the GSL-div: an illustrative application

  • Francesco Lamperti
Regular Article

Abstract

A major concern about the use of simulation models regards their relationship with the empirical data. The identification of a suitable indicator quantifying the distance between the model and the data would help and guide model selection and output validation. This paper proposes the use of a new criterion, called GSL-div and developed in Lamperti (Econ Stat, 2017.  https://doi.org/10.1016/j.ecosta.2017.01.006), to assess the degree of similarity between the dynamics observed in the data and those generated by the numerical simulation of models. As an illustrative application, this approach is used to distinguish between different versions of the well known asset pricing model with heterogeneous beliefs proposed in Brock and Hommes (J Econ Dyn Control 22(8–9):1235–1274, 1998.  https://doi.org/10.1016/S0165-1889(98)00011-6). Once the discrimination ability of the GSL-div is proved, model’s dynamics are directly compared with actual data coming from two major stock market indexes (EuroSTOXX 50 for Europe and CSI 300 for China). Results show that the model, once calibrated, is fairly able to track the evolution of both the two indexes, even though a better fit is reported for the Chinese stock market. However, I also find that many different combinations of traders’ behavioural rules are compatible with the same observed dynamics. Within this heterogeneity, an emerging common trait is found: to be empirically valid, the model has to account for a strong trend following component, which might either come from a unique trend type that heavily extrapolates information from past observations or the combinations of different types with milder, or even opposite, attitudes towards the trend.

Keywords

Simulated models Empirical validation Model selection GSL-div 

Notes

Acknowledgements

The author would like to thank Mattia Guerini, Napoletano, Andrea Roventini, all the participants to the 2016 CEF conference in Bordeaux, two anonymous referees and the editorial board for valuable comments and suggestions. All the shortcomings are the author’s.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Authors and Affiliations

  1. 1.Institute of Economics and LEMScuola Superiore Sant’AnnaPisaItaly

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