122,862 research outputs found
Consentaneous agent-based and stochastic model of the financial markets
We are looking for the agent-based treatment of the financial markets
considering necessity to build bridges between microscopic, agent based, and
macroscopic, phenomenological modeling. The acknowledgment that agent-based
modeling framework, which may provide qualitative and quantitative
understanding of the financial markets, is very ambiguous emphasizes the
exceptional value of well defined analytically tractable agent systems. Herding
as one of the behavior peculiarities considered in the behavioral finance is
the main property of the agent interactions we deal with in this contribution.
Looking for the consentaneous agent-based and macroscopic approach we combine
two origins of the noise: exogenous one, related to the information flow, and
endogenous one, arising form the complex stochastic dynamics of agents. As a
result we propose a three state agent-based herding model of the financial
markets. From this agent-based model we derive a set of stochastic differential
equations, which describes underlying macroscopic dynamics of agent population
and log price in the financial markets. The obtained solution is then subjected
to the exogenous noise, which shapes instantaneous return fluctuations. We test
both Gaussian and q-Gaussian noise as a source of the short term fluctuations.
The resulting model of the return in the financial markets with the same set of
parameters reproduces empirical probability and spectral densities of absolute
return observed in New York, Warsaw and NASDAQ OMX Vilnius Stock Exchanges. Our
result confirms the prevalent idea in behavioral finance that herding
interactions may be dominant over agent rationality and contribute towards
bubble formation.Comment: 17 pages, 6 figures, Gontis V, Kononovicius A (2014) Consentaneous
Agent-Based and Stochastic Model of the Financial Markets. PLoS ONE 9(7):
e102201. doi: 10.1371/journal.pone.010220
Price dynamics in financial markets: a kinetic approach
The use of kinetic modelling based on partial differential equations for the
dynamics of stock price formation in financial markets is briefly reviewed. The
importance of behavioral aspects in market booms and crashes and the role of
agents' heterogeneity in emerging power laws for price distributions is
emphasized and discussed
Realizing stock market crashes: stochastic cusp catastrophe model of returns under the time-varying volatility
This paper develops a two-step estimation methodology, which allows us to
apply catastrophe theory to stock market returns with time-varying volatility
and model stock market crashes. Utilizing high frequency data, we estimate the
daily realized volatility from the returns in the first step and use stochastic
cusp catastrophe on data normalized by the estimated volatility in the second
step to study possible discontinuities in markets. We support our methodology
by simulations where we also discuss the importance of stochastic noise and
volatility in deterministic cusp catastrophe model. The methodology is
empirically tested on almost 27 years of U.S. stock market evolution covering
several important recessions and crisis periods. Due to the very long sample
period we also develop a rolling estimation approach and we find that while in
the first half of the period stock markets showed marks of bifurcations, in the
second half catastrophe theory was not able to confirm this behavior. Results
suggest that the proposed methodology provides an important shift in
application of catastrophe theory to stock markets
The virtues and vices of equilibrium and the future of financial economics
The use of equilibrium models in economics springs from the desire for
parsimonious models of economic phenomena that take human reasoning into
account. This approach has been the cornerstone of modern economic theory. We
explain why this is so, extolling the virtues of equilibrium theory; then we
present a critique and describe why this approach is inherently limited, and
why economics needs to move in new directions if it is to continue to make
progress. We stress that this shouldn't be a question of dogma, but should be
resolved empirically. There are situations where equilibrium models provide
useful predictions and there are situations where they can never provide useful
predictions. There are also many situations where the jury is still out, i.e.,
where so far they fail to provide a good description of the world, but where
proper extensions might change this. Our goal is to convince the skeptics that
equilibrium models can be useful, but also to make traditional economists more
aware of the limitations of equilibrium models. We sketch some alternative
approaches and discuss why they should play an important role in future
research in economics.Comment: 68 pages, one figur
- …