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A Nonlinear Structural Model for Volatility Clustering

  • Andrea Gaunersdorfer
  • Cars Hommes

Summary

A simple nonlinear structural model of endogenous belief heterogeneity is proposed. News about fundamentals is an IID random process, but nevertheless volatility clustering occurs as an endogenous phenomenon caused by the interaction between different types of traders, fundamentalists and technical analysts. The belief types are driven by adaptive, evolutionary dynamics according to the success of the prediction strategies as measured by accumulated realized profits, conditioned upon price deviations from the rational expectations fundamental price. Asset prices switch irregularly between two different regimes — periods of small price fluctuations and periods of large price changes triggered by random news and reinforced by technical trading — thus, creating time varying volatility similar to that observed in real financial data.

Keywords

Asset Price Risky Asset Asset Price Model Return Series Price Series 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer Berlin · Heidelberg 2007

Authors and Affiliations

  • Andrea Gaunersdorfer
    • 1
  • Cars Hommes
    • 2
  1. 1.Department of Business StudiesUniversity of ViennaVienna
  2. 2.Center for Nonlinear Dynamics in Economics and FinanceUniversity of AmsterdamAmsterdam

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