Micro-Foundation of ARCH Model

4 Pages Posted: 5 Jan 2016 Last revised: 5 Apr 2016

See all articles by Takanobu Mizuta

Takanobu Mizuta

SPARX Asset Management Co., Ltd.

Date Written: January 4, 2016

Abstract

The Japanese version of this paper can be found at http://ssrn.com/abstract=2710516.

Many macroeconomic study argued macroeconomic models should be aggregated by micro processes models ("micro-foundation") and many micro-founded macroeconomic models were built. On the other hand, there are many models for price variation of a risk asset, which is macro phenomena, however, there are few studies for micro-foundation of such models. In this study we tried micro-foundation of an ARCH model using intelligence of artificial market simulation studies. That is we tried to clarify which micro processes determine each coefficient of an ARCH model. Then, we showed that the dispersion of investors' estimated prices is larger or the orders by the buy-sell imbalance taking liquidity are more, the volatility is larger. And we showed that the ration of the normal investors taking liquidity to the noise traders providing liquidity is higher or the measure of risk aversion of the normal investors is lower, the magnitude of volatility clustering is larger.

Keywords: micro-foundation, ARCH, GARCH

JEL Classification: G13

Suggested Citation

Mizuta, Takanobu, Micro-Foundation of ARCH Model (January 4, 2016). Available at SSRN: https://ssrn.com/abstract=2710457 or http://dx.doi.org/10.2139/ssrn.2710457

Takanobu Mizuta (Contact Author)

SPARX Asset Management Co., Ltd. ( email )

Tokyo
Japan

HOME PAGE: http://mizutatakanobu.com

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