Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/54994
Authors: 
Franke, Reiner
Westerhoff, Frank
Year of Publication: 
2011
Series/Report no.: 
BERG Working Paper Series 83
Abstract: 
The paper proposes an elementary agent-based asset pricing model that, invoking the two trader types of fundamentalists and chartists, comprises four features: (i) price determination by excess demand; (ii) a herding mechanism that gives rise to a macroscopic adjustment equation for the market fractions of the two groups; (iii) a rush towards fundamentalism when the price misalignment becomes too large; and (iv) a stronger noise component in the demand per chartist trader than in the demand per fundamentalist trader, which implies a structural stochastic volatility in the returns. Combining analytical and numerical methods, the interaction between these elements is studied in the phase plane of the price and a majority index. In addition, the model is estimated by the method of simulated moments, where the choice of the moments reflects the basic stylized facts of the daily returns of a stock market index. A (parametric) bootstrap procedure serves to set up an econometric test to evaluate the model's goodness-of-fit, which proves to be highly satisfactory. The bootstrap also makes sure that the estimated structural parameters are well identified.
Subjects: 
structural stochastic volatility
method of simulated moments
autocorrelation pattern
fat tails
bootstrapped p-values
JEL: 
D84
G12
G14
G15
ISBN: 
978-3-931052-93-5
Document Type: 
Working Paper

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