Testing of a market fraction model and power-law behaviour in the DAX 30

Xue Zhong He, Youwei Li*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

18 Citations (Scopus)

Abstract

This paper tests a simple market fraction asset pricing model with heterogeneous agents. By selecting a set of structural parameters of the model through a systematic procedure, we show that the autocorrelations (of returns, absolute returns and squared returns) of the market fraction model share the same pattern as those of the DAX 30. By conducting econometric analysis via Monte Carlo simulations, we characterize these power-law behaviours and find that estimates of the power-law decay indices, the (FI)GARCH parameters, and the tail index of the selected market fraction model closely match those of the DAX 30. The results strongly support the explanatory power of the heterogeneous agent models.

Original languageEnglish
Pages (from-to)1-17
Number of pages17
JournalJournal of Empirical Finance
Volume31
DOIs
Publication statusPublished - 1 Mar 2015
Externally publishedYes

Keywords

  • (FI)GARCH
  • Asset pricing
  • Fundamentalists and trend followers
  • Power-law
  • Tail index

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