Estimating Behavioural Heterogeneity Under Regime Switching
University of Technology Sydney Quantitative Finance Research Centre Research Paper No. 290
32 Pages Posted: 23 Oct 2012
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
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