From certain empirical behaviors in financial market, we derive a stochastic model that is ARCH-like. The main behaviors incorporated in this model are convergence of opinions among technical traders and their heterogeneous investment horizons. It first behaviors is found to explain the fat-tail distribution of returns, and the second explains the long memory in volatility. An explicit relation between the behaviors and the two stylized facts are given in terms of mathematical relations, which is verified empirically. The model shed some light on the apparent critical phenomenon of financial time series, and provides some behavioral interpretation to ARCH formulation.
Dr. Feng Ling is working as scientist in the Complex System Group at Institute of High Performance Computing (IHPC), Agency for Science Technology and Research (A-Star) of Singapore. Before that he was a research fellow at Center for Computational Science and Engineering, Physics Department, National University of Singapore. His research focuses on complex systems in social science and physiology. Dr. Feng got his PhD from Graduate school of NGS in National University of Singapore in 2013. In 2011 to 2013 he was a visiting scholar at H. Eugene Stanley’s group at Boston University.