Estimating behavioural heterogeneity under regime switching

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 cha...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2012-08, Vol.83 (3), p.446-460
Main Authors: Chiarella, Carl, He, Xue-Zhong, Huang, Weihong, Zheng, Huanhuan
Format: Article
Language:English
Subjects:
Boom and bust
Capital market
Economic behaviour
Economic forecasts
Economic organization
Estimation
Heterogeneity
Markov analysis
Markovian processes
Regime switching
Securities markets
Stock exchange
Stock prices
Studies
U.S.A
Volatility
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Summary: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.
ISSN:0167-2681
1879-1751
DOI:10.1016/j.jebo.2012.02.014