Kiel Working Papers, Kiel Institute for World Economics
No 1426:
Stochastic Behavioral Asset Pricing Models and the Stylized Facts
Thomas Lux
Abstract: High-frequency financial data are characterized by a set
of ubiquitous statistical properties that prevail with surprising
uniformity. While these 'stylized facts' have been well-known for decades,
attempts at their behavioral explanation have remained scarce. However,
recently a new branch of simple stochastic models of interacting traders
have been proposed that share many of the salient features of empirical
data. These models draw some of their inspiration from the broader current
of behavioral finance. However, their design is closer in spirit to models
of multi-particle interaction in physics than to traditional asset-pricing
models. This reflects a basic insight in the natural sciences that similar
regularities like those observed in financial markets (denoted as 'scaling
laws' in physics) can often be explained via the microscopic interactions
of the constituent parts of a complex system. Since these emergent
properties should be independent of the microscopic details of the system,
this viewpoint advocates negligence of the details of the determination of
individuals' market behavior and instead focuses on the study of a few
plausible rules of behavior and the emergence of macroscopic statistical
regularities in a market with a large ensemble of traders. This chapter
will review the philosophy of this new approach, its various
implementations, and its contribution to an explanation of the stylized
facts in finance
Keywords: Agent-based models, speculation, stylized facts, group dynamics; (follow links to similar papers)
JEL-Codes: C15,; D84,; G12; (follow links to similar papers)
79 pages, June 2008
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