Impact of Investor's Varying Risk Aversion on the Dynamics of Asset Price Fluctuations
| Autor: | Kan Chen, Baosheng Yuan |
|---|---|
| Rok vydání: | 2005 |
| Předmět: |
Physics - Physics and Society
Stylized fact Volatility clustering Index (economics) Statistical Finance (q-fin.ST) Risk aversion Quantitative Finance - Statistical Finance FOS: Physical sciences Physics and Society (physics.soc-ph) Computational Physics (physics.comp-ph) Random walk Microeconomics FOS: Economics and business Demand curve Isoelastic utility Economics Econometrics Stock market Physics - Computational Physics |
| DOI: | 10.48550/arxiv.physics/0506224 |
| Popis: | While the investors' responses to price changes and their price forecasts are well accepted major factors contributing to large price fluctuations in financial markets, our study shows that investors' heterogeneous and dynamic risk aversion (DRA) preferences may play a more critical role in the dynamics of asset price fluctuations. We propose and study a model of an artificial stock market consisting of heterogeneous agents with DRA, and we find that DRA is the main driving force for excess price fluctuations and the associated volatility clustering. We employ a popular power utility function, $U(c,\gamma)=\frac{c^{1-\gamma}-1}{1-\gamma}$ with agent specific and time-dependent risk aversion index, $\gamma_i(t)$, and we derive an approximate formula for the demand function and aggregate price setting equation. The dynamics of each agent's risk aversion index, $\gamma_i(t)$ (i=1,2,...,N), is modeled by a bounded random walk with a constant variance $\delta^2$. We show numerically that our model reproduces most of the ``stylized'' facts observed in the real data, suggesting that dynamic risk aversion is a key mechanism for the emergence of these stylized facts. Comment: 17 pages, 7 figures |
| Databáze: | OpenAIRE |
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