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Switching rates and the asymptotic behavior of herding models

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  • Irle, Albrecht
  • Kauschke, Jonas
  • Lux, Thomas
  • Milaković, Mishael

Abstract

Markov chains have experienced a surge of economic interest in the form of behavioral agent-based models that aim at explaining the statistical regularities of financial returns. We review some of the relevant mathematical facts and show how they apply to agent-based herding models, with the particular goal of establishing their asymptotic behavior because several studies have pointed out that the ability of such models to reproduce the stylized facts hinges crucially on the size of the agent population (typically denoted by n), a phenomenon that is also known as n-dependence. Our main finding is that n-(in)dependence traces back to both the topology and the velocity of information transmission among heterogeneous financial agents.

Suggested Citation

  • Irle, Albrecht & Kauschke, Jonas & Lux, Thomas & Milaković, Mishael, 2010. "Switching rates and the asymptotic behavior of herding models," Kiel Working Papers 1595, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1595
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    Cited by:

    1. S. Alfarano & M. Milakovic & M. Raddant, 2013. "A note on institutional hierarchy and volatility in financial markets," The European Journal of Finance, Taylor & Francis Journals, vol. 19(6), pages 449-465, July.
    2. Lux, Thomas & Alfarano, Simone, 2016. "Financial power laws: Empirical evidence, models, and mechanisms," Chaos, Solitons & Fractals, Elsevier, vol. 88(C), pages 3-18.

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    More about this item

    Keywords

    Markov chains; agent-based finance; herding; N-dependence;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G19 - Financial Economics - - General Financial Markets - - - Other

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