Stylized facts from a threshold-based heterogeneous agent model

Details Stylized facts from a threshold-based heterogeneous agent model Stylized facts from a threshold-based heterogeneous agent model

2006-07-31

arxiv.org/abs/physics/0607290v1

Physics

Computational Physics

Submitted to the Conference proceedings for APFA5, June 2006

Scientific paper

10.1140/epjb/e2007-00108-5

A class of heterogeneous agent models is investigated where investors switch trading position whenever their motivation to do so exceeds some critical threshold. These motivations can be psychological in nature or reflect behaviour suggested by the efficient market hypothesis (EMH). By introducing different propensities into a baseline model that displays EMH behaviour, one can attempt to isolate their effects upon the market dynamics. The simulation results indicate that the introduction of a herding propensity results in excess kurtosis and power-law decay consistent with those observed in actual return distributions, but not in significant long-term volatility correlations. Possible alternatives for introducing such long-term volatility correlations are then identified and discussed.

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