Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/85821
Authors: 
Diks, Cees
van der Weide, Roy
Year of Publication: 
2003
Series/Report no.: 
Tinbergen Institute Discussion Paper 03-103/1
Abstract: 
This paper considers a simple Continuous Beliefs System (CBS) toinvestigate the effects on price dynamics of several behavioralassumptions: (i) herd behaviour; (ii) a-synchronous updating ofbeliefs; and (iii) heterogeneity in time horizons (memory) amongagents. The recently introduced concept of a CBS allows one to model the co-evolution of prices and the beliefs distribution explicitly, while keeping track of the unpredictable nature of individual preferences (Diks and Van der Weide, 2003). As a benchmark model we take a simple CBS, which in a market withmany traders exhibits a random walk driven by news.Using the explicit nature of the dynamics of the CBS we show that the introduction of herding modifies the random walk to an ARIMA($0,1,1$) process, which is observationally equivalent to areduction of the number of market participants. In terms of returns the model predicts MA(1) structure with a negative coeffient. Asynchronous updating leads to an MA(1) model for returns with GARCH($1,1$) innovations, and predicts a relation between the ARCH and GARCH coefficients. Heterogeneity in memory leads to long-range dependence in returns. In the empirical section we perform a modest `reality check' concerning the predicted sign of the MA coefficient and the relation between the ARCH and GARCH coefficients for exchange rate data.
Subjects: 
Continuous beliefs systems
Random dynamical systems
Heterogeneity
Herding
ARIMA
GARCH
Long-range dependence
JEL: 
C5
G1
D8
F31
Document Type: 
Working Paper

Files in This Item:
File
Size
329.3 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.