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

Xue-Zhong He; Youwei Li

doi:10.1016/j.jempfin.2015.01.001

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

Xue-Zhong He, Youwei Li

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303 Downloads (Pure)

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.

Original language	English
Pages (from-to)	1-17
Number of pages	17
Journal	Journal of Empirical Finance
Volume	31
Early online date	15 Jan 2015
DOIs	https://doi.org/10.1016/j.jempfin.2015.01.001
Publication status	Published - Mar 2015

Keywords

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

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10.1016/j.jempfin.2015.01.001

Testing of a market fraction model and power-law behaviour in the DAX 30
Copyright 2015 Elsevier This is an open access article published under a Creative Commons Attribution-NonCommercial-NoDerivs License (https://creativecommons.org/licenses/by-nc-nd/4.0/), which permits distribution and reproduction for non-commercial purposes, provided the author and source are cited.
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http://ssrn.com/abstract=2547906

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abstract = "This paper tests a simple market fraction asset pricing model with heterogeneousagents. 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.",

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

Abstract

Keywords

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