Estimating Behavioural Heterogeneity Under Regime Switching

University of Technology Sydney Quantitative Finance Research Centre Research Paper No. 290

32 Pages Posted: 23 Oct 2012

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Xuezhong He

Xi'an Jiaotong-Liverpool University (XJTLU)

Weihong Huang

Nanyang Technological University (NTU) - School of Humanities & Social Sciences

Huanhuan Zheng

Nanyang Technological University (NTU) - Division of Economics

Date Written: May 1, 2011

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 S&P500 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 behavioral heterogeneity within-group and that the model exhibits good forecasting accuracy.

Keywords: estimation, heterogeneity, regime switching, boom and bust

JEL Classification: C13, C51, G01, G10, G12

Suggested Citation

Chiarella, Carl and He, Xue-Zhong 'Tony' and Huang, Weihong and Zheng, Huanhuan, Estimating Behavioural Heterogeneity Under Regime Switching (May 1, 2011). University of Technology Sydney Quantitative Finance Research Centre Research Paper No. 290, Available at SSRN: https://ssrn.com/abstract=2165656 or http://dx.doi.org/10.2139/ssrn.2165656

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Xue-Zhong 'Tony' He

Xi'an Jiaotong-Liverpool University (XJTLU) ( email )

111 Renai Road, SIP
, Lake Science and Education Innovation District
Suzhou, JiangSu province 215123
China

Weihong Huang

Nanyang Technological University (NTU) - School of Humanities & Social Sciences ( email )

Blk S3.2-B2
Nanyang Avenue
Singapore, 639798
Singapore

Huanhuan Zheng

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

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