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Estimating behavioural heterogeneity under regime switching

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  • Chiarella, Carl
  • He, Xue-Zhong
  • Huang, Weihong
  • Zheng, Huanhuan

Abstract

Financial markets are typically characterized by high (low) price level and low (high) volatility during boom (bust) periods, suggesting that price and volatility tend to move together with different market conditions/states. By proposing a simple heterogeneous agent model of fundamentalists and chartists with Markov chain regime-dependent expectations and applying the S&P 500 data from January 2000 to June 2010, we show that the estimation of the model matches well with the boom and bust periods in the US stock market. In addition, we find evidence of time-varying behavioural heterogeneity within-group and that the model exhibits good forecasting accuracy.

Suggested Citation

  • Chiarella, Carl & He, Xue-Zhong & Huang, Weihong & Zheng, Huanhuan, 2012. "Estimating behavioural heterogeneity under regime switching," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 446-460.
    • Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:446-460
    DOI: 10.1016/j.jebo.2012.02.014
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    More about this item

    Keywords

    Estimation; Heterogeneity; Regime switching; Boom and bust;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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