Estimating behavioural heterogeneity under regime switching

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

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

43 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 languageEnglish
Pages (from-to)446-460
Number of pages15
JournalJournal of Economic Behavior and Organization
Volume83
Issue number3
DOIs
Publication statusPublished - 2012
Externally publishedYes

Keywords

  • Boom and bust
  • Estimation
  • Heterogeneity
  • Regime switching

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