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A nonlinear structural model for volatility clustering

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Author Info
Gaunersdorfer, A. (University of Vienna)
Hommes, C.H., () (Universiteit van Amsterdam)

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Abstract

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.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 05-02.

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Date of creation: 2005
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Handle: RePEc:ams:ndfwpp:05-02

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  5. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2003. "Bifurcation Routes to Volatility Clustering under Evolutionary Learning," CeNDEF Working Papers 03-03, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
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