Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents

The Institute of Economics will hold a seminar meeting as part of its Seminar Series on Wednesday, June 28, 2022: Michele Vodret from the École Polytechnique will present the paper "Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents ".

Abstract

We relax the strong rationality assumption for the agents in the paradigmatic Kyle model of price formation, thereby reconciling the framework of asymmetrically informed traders with the Adaptive Market Hypothesis, where agents use inductive rather than deductive reasoning. Building on these ideas, we propose a stylised model able to account parsimoniously for a rich phenomenology, ranging from excess volatility to volatility clustering. While characterising the excess-volatility dynamics, we provide a microfoundation for GARCH models. Volatility clustering is shown to be related to the self-excited dynamics induced by traders' behaviour, and does not rely on clustered fundamental innovations. Finally, we propose an extension able to account for the fragile dynamics exhibited by real markets during flash crashes.

The seminar will be held in blended mode. In person participation is possible and available seats are allocated on a first come first served basis. For online participation please use the following link.