Estimating behavioural heterogeneity under regime switching

Carl Chiarella; Xue Zhong He; Weihong Huang; Huanhuan Zheng

doi:10.1016/j.jebo.2012.02.014

Estimating behavioural heterogeneity under regime switching

Carl Chiarella, Xue Zhong He, Weihong Huang, Huanhuan Zheng^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

44 Citations (Scopus)

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.

Original language	English
Pages (from-to)	446-460
Number of pages	15
Journal	Journal of Economic Behavior and Organization
Volume	83
Issue number	3
DOIs	https://doi.org/10.1016/j.jebo.2012.02.014
Publication status	Published - 2012
Externally published	Yes

Keywords

Boom and bust
Estimation
Heterogeneity
Regime switching

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10.1016/j.jebo.2012.02.014

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title = "Estimating behavioural heterogeneity under regime switching",

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.",

keywords = "Boom and bust, Estimation, Heterogeneity, Regime switching",

author = "Carl Chiarella and He, {Xue Zhong} and Weihong Huang and Huanhuan Zheng",

note = "Funding Information: This work was initiated while Huanhuan Zheng was visiting the University of Technology, Sydney (UTS), whose hospitality she gratefully acknowledges. The financial support for Chiarella and He from the Australian Research Council (ARC) under Discovery Grant ( DP0773776 ) is gratefully acknowledged. We would like to thank Willi Semmler and Lucas Bernard, the editors of this special issue, Remco Zwinkels and participants of the 2011 Guangzhou Conference on Nonlinear Economic Dynamics and Financial Market Modelling for helpful comments. The usual caveat applies. ",

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AU - Huang, Weihong

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AB - 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.

KW - Boom and bust

KW - Estimation

KW - Heterogeneity

KW - Regime switching

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Estimating behavioural heterogeneity under regime switching

Abstract

Keywords

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