Investigating effect of mean residence time on herd behavior on Tehran stock exchange index volatility by Heston model

Subject Areas : Financial Knowledge of Securities Analysis

Zahra Shirazian ¹ (Faculty Member of Management, Islamic Azad University, Malayer Branch, Malayer, Iran)

Received: 2017-01-08 Accepted : 2017-06-10 Published : 2019-01-21

Keywords: volatility, Tehran Stock Exchange Index, Heston model, Herd behavior, Mean residence time,

Abstract :

In this article investigate the herd behavior of stock prices inTehran stock exchange with the Heston model. Basing on parameter estimation of the Heston model obtained by minimizing the mean square deviation between the theoretical and empirical return distributions, we simulate mean residence time of positive return.Plots of mean residence time of positive return against the amplitude or mean reversion of volatility demonstrate a phenomenon of herd behavior for a positive cross correlation between noise sources of the Heston model. Also, for a negative cross correlation, a phenomenon of herd behavior is observed in plots of mean residence time of positive return (MRTPR) against the long-run variance by increasing amplitude or mean reversion of volatility. From the simulating results of MRTPR, we observe that (i) when MRTPR is regarded as a function of the amplitude of volatility fluctuation c, there is a phenomenon of the herd behavior for a positive cross correlation between two Wiener processes of stock price and volatility (i.e., λ > 0); (ii) when MRTPR is regarded as a function of mean reversion a, there is a phenomenon of the herd behavior for our considered values of b and c under λ > 0; (iii) increasing a or c induces a phenomenon of the herd behavior under λ < 0 when MRTPR is regarded as a function of mean reversion b.

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