TIME-VARIATION OF 2ND MOMENTS FROM A NOISE TRADER INFECTION MODEL

This paper considers the dynamics of conditional second moments result ing from a statistical description of agents' attitudes and behaviour in a noise trader/infection framework. In general, the dynamics of sec ond moments of state variables (e.g. prices) can be seen to exhibit au toregressive structures. Conforming to well-known empirical findings, volatility can change over time, shocks to volatility have lasting eff ects and mean-reversion in second moments is observed. Thus, this kind of market microstructure modelling can contribute to explain the regu larities in variances found in data from asset markets and foreign exc hange markets.