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Estimation of an Adaptive Stock Market Model with Heterogeneous Agents

Author

Listed:
  • Amilon, Henrik

    (European Central Bank)

Abstract
Standard economic models based on rational expectations and homogeneity have problems explaining the complex and volatile nature of financial markets. Recently, boundedly rational and heterogeneous agent models have been developed and simulated returns are found to exhibit various stylized facts, such as volatility clustering and fat tails. Here, we are interested in how well the proposed models can explain all the properties seen in real data, not just one or a few at a time. Hence, we do a proper estimation of some simple versions of such a model by the use of efficient method of moments and maximum likelihood and compare the results to real data and more traditional econometric models. We discover two main findings. First, the similarities with observed data found in earlier simulations rely crucially on a somewhat unrealistic modeling of the noise term. Second, when the stochastic is more properly introduced we find that the models are able to generate some stylized facts, but that the fit generally is quite poor.

Suggested Citation

  • Amilon, Henrik, 2005. "Estimation of an Adaptive Stock Market Model with Heterogeneous Agents," Working Paper Series 177, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0177
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    More about this item

    Keywords

    Efficient method of moments; heterogeneous expectations; bounded rationality; evolutionary dynamics; adaptive beliefs;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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