An intelligent system for risk classification of stock investment projects

The proposed paper demonstrates that a hybrid fuzzy neural network can serve as a risk classifier of stock investment projects. The training algorithm for the regular part of the network is based on bidirectional incremental evolution proving more efficient than direct evolution. The approach is compared with other crisp and soft investment appraisal and trading techniques, while building a multimodel domain representation for an intelligent decision support system. Thus the advantages of each model are utilised while looking at the investment problem from different perspectives. The empirical results are based on UK companies traded on the London Stock Exchange

Effects of diversification among assets in an agent-based market model

We extend to the multi-asset case the framework of a discrete time model of a single asset financial market developed in Ghoulmie et al (2005). In particular, we focus on adaptive agents with threshold behavior allocating their resources among two assets. We explore numerically the effect of this diversification as an additional source of complexity in the financial market and we discuss its destabilizing role. We also point out the relevance of these studies for financial decision making.Comment: 12 pages, 5 figures, accepted for publication in the Proceedings of the Complex Systems II Conference at the Australian National University, 4-7 December 2007, Canberra, ACT Australi

Simple Market Protocols for Efficient Risk Sharing

This paper studies the performance of four market protocols with egard to allocative efficiency and other performance criteria such as volume or volatility. We examine batch auctions, continuous double auctions, specialist dealerships, and a hybrid of these last two. All protocols are practically implementable because the messages that traders need to use are simple. We test the protocols by running (computerized) experiments in an environment that controls for tradersÕ behavior and rules out any informational effect. We find that all protocols generically converge to the efficient allocation in finite time. An extended comparison over other performance criteria produces no clear winner, but the presence of a specialist is associated with the best all-round performance.market microstructure, allocative efficiency, comparison of market institutions, performance criteria.

The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows

In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. Agents are assumed to have three components to the expectation of future asset returns, namely-fundamentalist, chartist and noise trader. Furthermore agents differ in the characteristics describing these components, such as time horizon, risk aversion and the weights given to the various components. The model developed here extends a great deal of earlier literature in that the order submissions of agents are determined by utility maximisation, rather than the mechanical unit order size that is commonly assumed. In this way the order flow is better related to the ongoing evolution of the market. For the given market structure we analyze the impact of the three components of the trading strategies on the statistical properties of prices and order flows and observe that it is the chartist strategy that is mainly responsible of the fat tails and clustering in the artificial price data generated by the model. The paper provides further evidence that large price changes are likely to be generated by the presence of large gaps in the book

Transaction costs and institutions: investments in exchange

This paper proposes a simple model for understanding transaction costs – their composition, size and policy implications. We distinguish between investments in institutions that facilitate exchange and the cost of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk adverse agents and conditions are discussed under which the efficient allocation may be decentralized. We highlight a number of differences with models where transaction costs are exogenous, including the implications for taxation and measurement issues

Why people choose negative expected return assets - an empirical examination of a utility theoretic explanation

Using a theoretical extension of the Friedman and Savage (1948) utility function developed in Bhattacharyya (2003), we predict that for financial assets with negative expected returns, expected return will be a declining and convex function of skewness. Using a sample of U.S. state lottery games, we find that our theoretical conclusions are supported by the data. Our results have external validity as they also hold for an alternative and more aggregated sample of lottery game data.

Ambiguity in asset pricing and portfolio choice: a review of the literature

A growing body of empirical evidence suggests that investors’ behavior is not well described by the traditional paradigm of (subjective) expected utility maximization under rational expectations. A literature has arisen that models agents whose choices are consistent with models that are less restrictive than the standard subjective expected utility framework. In this paper we conduct a survey of the existing literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices. We conclude that the ambiguity literature has led to a number of significant advances in our ability to rationalize empirical features of asset returns and portfolio decisions, such as the empirical failure of the two-fund separation theorem in portfolio decisions, the modest exposure to risky securities observed for a majority of investors, the home equity preference in international portfolio diversification, the excess volatility of asset returns, the equity premium and the risk-free rate puzzles, and the occurrence of trading break-downs.Capital assets pricing model ; Investments