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News-Driven Expectations And Volatility Clustering, Sabiou M. Inoua

ESI Publications

Financial volatility obeys two fascinating empirical regularities that apply to various assets, on various markets, and on various time scales: it is fat-tailed (more precisely power-law distributed) and it tends to be clustered in time. Many interesting models have been proposed to account for these regularities, notably agent-based models, which mimic the two empirical laws through a complex mix of nonlinear mechanisms such as traders switching between trading strategies in highly nonlinear way. This paper explains the two regularities simply in terms of traders’ attitudes towards news, an explanation that follows from the very traditional dichotomy of financial market participants, …