Testing of a Market Fraction Model and Power-Law Behaviour in the DAX 30
35 Pages Posted: 11 Jan 2015 Last revised: 22 Sep 2015
Date Written: January 21, 2015
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.
Keywords: Asset pricing, fundamentalists and trend followers, (FI)GARCH, power-law, tail index
JEL Classification: C15, D84, G12
Suggested Citation: Suggested Citation