2015 Discussion papers
School of Economics Discussion Paper 15/07
Direct calibration and comparison of agent-based
herding models of financial markets
University of Kent
The present paper aims to test a new model comparison methodology by calibrating and comparing three agent-based models of financial markets on the daily returns of 18 indices. The models chosen for this empirical application are the herding model of Gilli & Winker, its asymmetric version by Alfarano, Lux & Wagner and the more recent model by Franke & Westerhoff, which all share a common lineage to the herding model introduced by Kirman (1993). In addition, standard ARCH processes are included for each financial series to provide a benchmark for the explanatory power of the models. The methodology provides a clear and consistent ranking of the three models. More importantly, it also reveals that the best performing model, Franke & Westerhoff, is generally not distinguishable from an ARCH-type process, suggesting their explanatory power on the data is similar.
JEL Classification: C15; C52; G12
Keywords: Model selection; agent-based models; herding behaviour
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