Testing the Presence of Adaptive Switching Behavior in Equity Markets
|Author:||Mgr. Filip Staněk|
|Year:||2016 - summer|
|Leaders:|| PhDr. Jiří Kukačka Ph.D.
|Work type:|| Economic Theory
|Awards and prizes:|
|Abstract:||In many financial agent based models, the concept of adaptive switching behavior
is employed as a substitute for the, elegant yet unrealistic, assumption
of rational expectations. Studies estimating these models however frequently
suggest that agents do not behave adaptively. To better understand the source
of this discrepancy, we propose a test for the presence of switching which does
not require us to specify beforehand the exact form of the switching mechanism
nor the strategies among which agents can choose. We verify the ability
of the test to detect switching by Monte Carlo simulations and then apply it
to stock prices from the New York Stock Exchange. The null hypothesis of the
absence of switching is strongly rejected. Furthermore, we assess robustness of
this finding by applying the test individually to various sub-sets of the data-set.
The switching is prevalent in all considered sub-periods and in all groups of
stocks categorized by traded volume.