Heterogeneous expectations and long-range correlation of the volatility of asset returns |
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Authors: | J Coulon Y Malevergne |
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Institution: | 1. SCOR Services Switzerland Ltd , General Guisan-Quai 26, 8022 Zurich, Switzerland jcoulon@scor.com;3. Université de Lyon, Université de Saint-Etienne , Coactis E.A. 4161, 42023 Saint-Etienne, France;4. EMLYON Business School , Cefra, 69134 Ecully, France;5. Department of Management , Economics and Technology , ETH Zurich, 8032 Zurich, Switzerland |
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Abstract: | Inspired by the recent literature on aggregation theory, we attempt to relate the long-range correlation of the stock return volatility to the heterogeneity of the investors' expectations concerning the level of the future volatility. Based on a semi-parametric model of investors' anticipations, we make the connection between the distributional properties of the heterogeneity parameters and the auto-covariance/auto-correlation functions of the realized volatility. We report different behaviors, or change of convention, the observation of which depends on the market phase under consideration. In particular, we report and justify the fact that the volatility exhibits significantly longer memory during phases of a speculative bubble than during the recovery phase following the collapse of a speculative bubble. |
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Keywords: | Realized volatility Aggregation model Long memory Bounded rationality |
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