Heterogeneous volatility cascade in financial markets

Details Heterogeneous volatility cascade in financial markets Heterogeneous volatility cascade in financial markets

2001-05-08

arxiv.org/abs/cond-mat/0105162v1

Physics

Condensed Matter

Statistical Mechanics

10 pages, 2 figures, To be published in Physica A

Scientific paper

10.1016/S0378-4371(01)00249-7

Using high frequency data, we have studied empirically the change of volatility, also called volatility derivative, for various time horizons. In particular, the correlation between the volatility derivative and the volatility realized in the next time period is a measure of the response function of the market participants. This correlation shows explicitly the heterogeneous structure of the market according to the characteristic time horizons of the differents agents. It reveals a volatility cascade from long to short time horizons, with a structure different from the one observed in turbulence. Moreover, we have developed a new ARCH-type model which incorporates the different groups of agents, with their characteristic memory. This model reproduces well the empirical response function, and allows us to quantify the importance of each group.

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