Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents

@article{Vodret2022MicrofoundingGM,
  title={Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents},
  author={Michele Vodret and Iacopo Mastromatteo and Bence T{\'o}th and Michael Benzaquen},
  journal={SSRN Electronic Journal},
  year={2022}
}
We relax the strong rationality assumption for the agents in the paradigmatic Kyle model of price formation, thereby reconciling the framework of asymmetrically informed traders with the Adaptive Market Hypothesis, where agents use inductive rather than deductive reasoning. Building on these ideas, we propose a stylised model able to account parsimoniously for a rich phenomenology, rang-ing from excess volatility to volatility clustering. While characterising the excess-volatility dynamics, we… 

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