A homoclinic route to volatility: Dynamics of asset prices under autoregressive forecasting
- Publication Type:
- Global Analysis of Dynamic Models in Economics and Finance: Essays in Honour of Laura Gardini, 2012, pp. 289 - 316
- Issue Date:
© 2013 Springer-Verlag Berlin Heidelberg. All rights are reserved. The article investigates the impact of mean-reverting forecasts in a model of asset pricing with two groups of investors under market clearing. Fundamentalists believe that asset prices follow an exogenous stochastic process, while chartists assume that asset prices follow a stochastic geometric decay process. For high values of mean reversion a period-doubling bifurcation occurs followed by a Neimark-Sacker bifurcation, after which homoclinic points exist inducing chaotic dynamics. Before the occurrence of homoclinic points, all orbits induce significant fluctuations with recurring symmetries and nonvanishing autocorrelations in all time series of prices and returns. After the homoclinic bifurcation, prices and returns follow alternating phases with low fluctuations near the steady state followed by phases with large excursions from the steady state. This shows that nonlinearities of the deterministic model rather than random perturbations are the causes of volatility clustering and of the generation of fat tails. Autocorrelations of prices and returns vanish while those of absolute returns and squared returns persist for high-order lags. Thus, the model is able to reproduce some important empirical market features.
Please use this identifier to cite or link to this item: