Long memory in financial markets: A heterogeneous agent model perspective

Zheng, Min; Liu, Ruipeng; Li, Youwei

Abstract

During last decades, studies on asset pricing models witnessed a paradigm shift from rational expectation and representative agent to an alternative, behavioral view, where agents are heterogeneous and boundedly rational. In this paper, we model the financial market as an interaction of two types of boundedly rational investors — fundamentalists and chartists. We examine the dynamics of the market price and market behavior, which depend on investors' behavior and the interaction of the two types of investors. Numerical simulations of the corresponding stochastic model demonstrate that the model is able to replicate the stylized facts of financial time series, in particular the long-term dependence (long memory) of asset return volatilities. We further investigate the source of the long memory according to asset pricing mechanism of our model, and provide evidences of long memory by applying the modified R/S analysis. Our results demonstrate that the key parameter that has impact on the long memory is the speed of the price adjustment of the market maker at the equilibrium of demand and supply.

Citation

Zheng, M., Liu, R., & Li, Y. (2018). Long memory in financial markets: A heterogeneous agent model perspective. International review of financial analysis, 58, 38-51. https://doi.org/10.1016/j.irfa.2018.04.001

• Journal Article Type: Article
• Acceptance Date: Apr 20, 2018
• Online Publication Date: May 4, 2018
• Publication Date: 2018-07
• Deposit Date: Mar 19, 2019
• Publicly Available Date: Nov 5, 2019
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 58
• Pages: 38-51
• DOI: https://doi.org/10.1016/j.irfa.2018.04.001
• Keywords: Heterogeneity; Bounded rationality; Asymmetrical beliefs; Long memory; Modified R/S test
• Public URL: https://hull-repository.worktribe.com/output/1113477
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1057521917301990?via%3Dihub
• Additional Information: This article is maintained by: Elsevier; Article Title: Long memory in financial markets: A heterogeneous agent model perspective; Journal Title: International Review of Financial Analysis; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.irfa.2018.04.001; Content Type: article; Copyright: © 2018 Elsevier Inc. All rights reserved.
• Contract Date: Mar 21, 2019