Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents

Autor:	Vodret, Michele, Mastromatteo, Iacopo, Toth, Bence, Benzaquen, Michael
Rok vydání:	2022
Předmět:	Quantitative Finance - Trading and Market Microstructure Condensed Matter - Statistical Mechanics Economics - Theoretical Economics
Druh dokumentu:	Working Paper
Popis:	We relax the strong rationality assumption for the agents in the paradigmatic Kyle model of price formation, thereby reconciling the framework of asymmetrically informed traders with the Adaptive Market Hypothesis, where agents use inductive rather than deductive reasoning. Building on these ideas, we propose a stylised model able to account parsimoniously for a rich phenomenology, ranging from excess volatility to volatility clustering. While characterising the excess-volatility dynamics, we provide a microfoundation for GARCH models. Volatility clustering is shown to be related to the self-excited dynamics induced by traders' behaviour, and does not rely on clustered fundamental innovations. Finally, we propose an extension to account for the fragile dynamics exhibited by real markets during flash crashes. Comment: 20 pages, 8 figures
Databáze:	arXiv
Externí odkaz:	http://arxiv.org/abs/2206.06764 Zobrazit plný text záznamu View this record from Arxiv