Volatility clustering in financial markets based on the agent based model

Subject Areas : Financial engineering

zahra  shirazian ¹ (Faculty member of Azad Univercity Branch malayer)
Hashem  Nikoomaram ² (Prof, Faculty Member, Department of financial management, Science and Research Branch, Islamic Azad University, Tehran, Iran)
Fereydoon  Rahnamay Roodposhti ³ (Prof, Faculty Member, Department of financial management, Science and Research Branch, Islamic Azad University, Tehran, Iran)
Taghi  TORABI ⁴ (Faculty Member, Department of Economy, Science and Research Branch, Islamic Azad University, Tehran, Iran.)

Received: 2017-10-25 Accepted : 2018-01-13 Published : 2018-09-23

Keywords: clustering of fluctuations, baseline simulation, switching, investor inertia,

Abstract :

The purpose of this study is to investigate the clustering of fluctuations in financial markets, including the stock market, with the underlying model of simulation. Time series of financial asset returns show the clustering of volatility, which shows that large changes in prices tend to form clusters together And these clusters will last for a long time. Time series of financial asset returns often exhibit the volatility clustering property: large changes in prices tend to cluster together, resulting in persistence of the amplitudes of price changes. After recalling various methods for quantifying and modeling this phenomenon, we discuss several economic mechanisms which have been proposed to explain the origin of this volatility clustering in terms of behavior of market participants and the news arrival process. A common feature of these models seems to be a switching between low and high activity regimes with heavy-tailed durations of regimes. Finally, we discuss a simple agent-based model which links such variations in market activity to threshold behavior of market participants and suggests a link between volatility clustering and investor inertia.