An evolutionary game theory explanation of ARCH effects Export

@article{citeulike:841026, abstract = {While ARCH/GARCH equations have been widely used to model financial market data, formal explanations for the sources of conditional volatility are scarce. This paper presents a model with the property that standard econometric tests detect ARCH/GARCH effects similar to those found in asset returns. We use evolutionary game theory to describe how agents endogenously switch among different forecasting strategies. The agents evaluate past forecast errors in the context of an optimizing model of asset pricing given heterogeneous agents. We show that the prospects for divergent expectations depend on the relative variances of fundamental and extraneous variables and on how aggressively agents are pursuing the optimal forecast. Divergent expectations are the driving force leading to the appearance of ARCH/GARCH in the data.}, author = {Parke, William R. and Waters, George A.}, citeulike-article-id = {841026}, citeulike-linkout-0 = {http://dx.doi.org/10.1016/j.jedc.2006.05.013}, citeulike-linkout-1 = {http://www.sciencedirect.com/science/article/B6V85-4KVXPHM-1/2/c6eea0ecf445eba7c3ddf475d7e3527c}, doi = {10.1016/j.jedc.2006.05.013}, journal = {Journal of Economic Dynamics and Control}, keywords = {game, garch}, posted-at = {2006-09-12 16:30:16}, priority = {2}, title = {An evolutionary game theory explanation of ARCH effects}, url = {http://dx.doi.org/10.1016/j.jedc.2006.05.013}, volume = {In Press, Corrected Proof} }

TY - JOUR ID - citeulike:841026 L3 - citeulike-article-id:841026 N2 - While ARCH/GARCH equations have been widely used to model financial market data, formal explanations for the sources of conditional volatility are scarce. This paper presents a model with the property that standard econometric tests detect ARCH/GARCH effects similar to those found in asset returns. We use evolutionary game theory to describe how agents endogenously switch among different forecasting strategies. The agents evaluate past forecast errors in the context of an optimizing model of asset pricing given heterogeneous agents. We show that the prospects for divergent expectations depend on the relative variances of fundamental and extraneous variables and on how aggressively agents are pursuing the optimal forecast. Divergent expectations are the driving force leading to the appearance of ARCH/GARCH in the data. JF - Journal of Economic Dynamics and Control TI - An evolutionary game theory explanation of ARCH effects VL - In Press, Corrected Proof KW - game KW - garch AU - Parke, William AU - Waters, George UR - http://dx.doi.org/10.1016/j.jedc.2006.05.013 ER -