Empirical Validation of Simulated Models through the GSL-div: An Illustrative Application

LEM Working Paper No. 2016/18

31 Pages Posted: 12 Jul 2016 Last revised: 13 Nov 2017

See all articles by Francesco Lamperti

Francesco Lamperti

Scuola Superiore Sant'Anna di Pisa - Institute of Economics and LEM; Fondazione Eni Enrico Mattei (FEEM)

Date Written: April 24, 2016

Abstract

A major concern about the use of simulation models regards their relationship with the empirical data. The identification of a suitable indicator quantifying the distance between the model and the data would help and guide model selection and output validation. This paper proposes the use of a new criterion, called GSL-div and developed in Lamperti (2017), to assess the degree of similarity between the dynamics observed in the data and those generated by the numerical simulation of models. As an illustrative application, this approach is used to distinguish between different versions of the well known asset pricing model with heterogeneous beliefs proposed in Brock and Hommes (1998). Once the discrimination ability of the GSL-div is proved, model’s dynamics are directly compared with actual data coming from two major stock market indexes (EuroSTOXX 50 for Europe and CSI 300 for China). Results show that the model, once calibrated, is fairly able to track the evolution of both the two indexes, even though a better fit is reported for the Chinese stock market. However, I also find that many different combinations of traders behavioural rules are compatible with the same observed dynamics. Within this heterogeneity, an emerging common trait is found: to be empirically valid, the model has to account for a strong trend following component, which might either come from a unique trend type that heavily extrapolates information from past observations or the combinations of different types with milder, or even opposite, attitudes towards the trend.

Keywords: Simulated Models, Empirical Validation, Model Selection, GSL-div

JEL Classification: C15, C52, C63

Suggested Citation

Lamperti, Francesco, Empirical Validation of Simulated Models through the GSL-div: An Illustrative Application (April 24, 2016). LEM Working Paper No. 2016/18, Available at SSRN: https://ssrn.com/abstract=2807557 or http://dx.doi.org/10.2139/ssrn.2807557

Francesco Lamperti (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Institute of Economics and LEM ( email )

Institute of Economics
Piazza Martiri della Liberta, n. 33
Pisa, Pisa 56127
Italy

Fondazione Eni Enrico Mattei (FEEM) ( email )

C.so Magenta 63
Milano, 20123
Italy

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