Stochastic modelling of herd behaviour indices

Florence Guillaume, Daniël Linders

Research output: Contribution to journalArticlepeer-review

Abstract

This paper proposes different diffusion processes to model herd behaviour indices such as the Herd Behaviour Index (HIX). These models arise by combining popular mean-reverting processes with simple algebraic functions mapping the definition domain of the underlying mean-reverting process to the unit interval. The so obtained Itô processes preserve, to some extent, the mean-reverting trend of the underlying process while satisfying the fundamental properties of the so-called herd behaviour indices. In a numerical study, we calibrate the different model settings to time series data for a period spanning from January 2000 until October 2009 and investigate their ability to predict the future behaviour of herd behaviour indices.

Original languageEnglish (US)
Pages (from-to)1963-1977
Number of pages15
JournalQuantitative Finance
Volume15
Issue number12
DOIs
StatePublished - Dec 2 2015
Externally publishedYes

Keywords

  • Comonotonicity
  • Herd behaviour modelling
  • Mean-reverting processes
  • Time-dependent diffusion processes

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance(all)

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