A Nonlinear Structural Model for Volatility Clustering

21 Pages Posted: 23 Oct 2000

See all articles by Andrea Gaunersdorfer

Andrea Gaunersdorfer

University of Vienna, Deparment of Finance

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Date Written: September 1, 2000

Abstract

A simple nonlinear structural model of endogenous belief heterogeneity is proposed. News about fundamentals is an IID random process, but nevertheless volatility clustering occurs as an endogenous phenomenon caused by the interaction between different types of traders, fundamentalists and technical analysts. The belief types are driven by an adaptive, evolutionary dynamics according to the success of the prediction strategies in the recent past conditioned upon price deviations from the rational expectations fundamental price. Asset prices switch irregularly between two different regimes - close to the fundamental price fluctuations with low volatility, and periods of persistent deviations from fundamentals where the market is dominated by technical trading - thus, creating time varying volatility similar to that observed in real financial data.

JEL Classification: G12, D84, E32

Suggested Citation

Gaunersdorfer, Andrea and Hommes, Cars H., A Nonlinear Structural Model for Volatility Clustering (September 1, 2000). EFA 0623; SFB Working Paper 63; Univ. of Vienna & Vienna Univ. of Economics & Business Admin. & CeNDEF Working Paper; Univ. of Amsterdam. Available at SSRN: https://ssrn.com/abstract=241349 or http://dx.doi.org/10.2139/ssrn.241349

Andrea Gaunersdorfer

University of Vienna, Deparment of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

HOME PAGE: http://homepage.univie.ac.at/andrea.gaunersdorfer

Cars H. Hommes (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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