Eur. Phys. J. B 57, 213-218 (2007)
https://doi.org/10.1140/epjb/e2007-00108-5

Stylized facts from a threshold-based heterogeneous agent model

¹ Department of Economics, University of Strathclyde, Sir William Duncan Building, 130 Rottenrow Glasgow G4 0GE, Scotland, UK
² Department of Mathematics, University of Strathclyde, Livingstone Tower, 26 Richmond Street, Glasgow G1 1XH, Scotland, UK
³ Department of Mathematical Sciences, George Mason University, 4400 University Drive, Fairfax, VA, 22030, USA
⁴ School of Computational Sciences, George Mason University, 4400 University Drive, Fairfax, VA, 22030, USA

Corresponding author: ^a hlamba@gmu.edu

Received: 31 August 2006
Revised: 19 December 2006
Published online: 27 April 2007

Abstract

A class of heterogeneous agent models is investigated where investors switch trading position whenever their motivation to do so exceeds some critical threshold. These motivations can be psychological in nature or reflect behaviour suggested by the efficient market hypothesis (EMH). By introducing different propensities into a baseline model that displays EMH behaviour, one can attempt to isolate their effects upon the market dynamics. The simulation results indicate that the introduction of a herding propensity results in excess kurtosis and power-law decay consistent with those observed in actual return distributions, but not in significant long-term volatility correlations. Possible alternatives for introducing such long-term volatility correlations are then identified and discussed.