Testing of a Market Fraction Model and Power-Law Behaviour in the DAX 30

35 Pages Posted: 11 Jan 2015 Last revised: 22 Sep 2015

See all articles by Xuezhong He

Xuezhong He

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network (FIRN)

Youwei Li

Hull University Business School

Date Written: January 21, 2015

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.

Keywords: Asset pricing, fundamentalists and trend followers, (FI)GARCH, power-law, tail index

JEL Classification: C15, D84, G12

Suggested Citation

He, Xue-Zhong 'Tony' and Li, Youwei, Testing of a Market Fraction Model and Power-Law Behaviour in the DAX 30 (January 21, 2015). Journal of Empirical Finance, Volume 31, March 2015, Pages 1–17. Available at SSRN: https://ssrn.com/abstract=2547906

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Youwei Li (Contact Author)

Hull University Business School ( email )

University of Hull
Hull, HU6 7RX
United Kingdom

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