On the Concept of Endogenous Volatility
Most financial and economic time-series display a strong volatility around their trends. The difficulty in explaining this volatility has led economists to interpret it as exogenous, i.e., as the result of forces that lie outside the scope of the assumed economic relations. Consequently, it becomes hard or impossible to formulate short-run forecasts on asset prices or on values of macroeconomic variables. However, many random looking economic and financial series may, in fact, be subject to deterministic irregular behavior, which can be measured and modelled. We address the notion of endogenous volatility and exemplify the concept with a simple business-cycles model.
KeywordsEndogenous volatility Volatility clustering Nonlinear dynamics Chartists and fundamentalists Periodicity and chaos Business cycles
the author would like to thank the participants and the organizers of the XII Iberian-Italian congress of financial and actuarial mathematics (Lisbon, July 2011), where an earlier draft of this paper was presented; the author also thanks an anonymous referee and the editors for helpful comments. The usual disclaimer applies.
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