27,754 research outputs found
Markets, herding and response to external information
We focus on the influence of external sources of information upon financial
markets. In particular, we develop a stochastic agent-based market model
characterized by a certain herding behavior as well as allowing traders to be
influenced by an external dynamic signal of information. This signal can be
interpreted as a time-varying advertising, public perception or rumor, in favor
or against one of two possible trading behaviors, thus breaking the symmetry of
the system and acting as a continuously varying exogenous shock. As an
illustration, we use a well-known German Indicator of Economic Sentiment as
information input and compare our results with Germany's leading stock market
index, the DAX, in order to calibrate some of the model parameters. We study
the conditions for the ensemble of agents to more accurately follow the
information input signal. The response of the system to the external
information is maximal for an intermediate range of values of a market
parameter, suggesting the existence of three different market regimes:
amplification, precise assimilation and undervaluation of incoming information.Comment: 30 pages, 8 figures. Thoroughly revised and updated version of
arXiv:1302.647
On Financial Markets Trading
Starting from the observation of the real trading activity, we propose a
model of a stockmarket simulating all the typical phases taking place in a
stock exchange. We show that there is no need of several classes of agents once
one has introduced realistic constraints in order to confine money, time, gain
and loss within an appropriate range. The main ingredients are local and global
coupling, randomness, Zipf distribution of resources and price formation when
inserting an order. The simulation starts with the initial public offer and
comprises the broadcasting of news/advertisements and the building of the book,
where all the selling and buying orders are stored. The model is able to
reproduce fat tails and clustered volatility, the two most significant
characteristics of a real stockmarket, being driven by very intuitive
parameters.Comment: 18 pages, submitte
Uninformative announcements and asset trading behavior
Financial markets are overwhelmed by daily announcements. We use experimental asset markets to assess the
impact of uninformative communications on asset prices and trading volumes. We deliver uninformative
messages in standard experimental asset markets and find that trading volumes and prices are impacted by
these messages. In particular, the release of a pre-announced preset message to traders “The price is too high”
in predetermined trading periods decreases the amplitude and duration of bubbles. Also, the release of the
messages “The price is too high” or “The price is too low” reduces trading volume with inexperienced subjects
Critical Market Crashes
This review is a partial synthesis of the book ``Why stock market crash''
(Princeton University Press, January 2003), which presents a general theory of
financial crashes and of stock market instabilities that his co-workers and the
author have developed over the past seven years. The study of the frequency
distribution of drawdowns, or runs of successive losses shows that large
financial crashes are ``outliers'': they form a class of their own as can be
seen from their statistical signatures. If large financial crashes are
``outliers'', they are special and thus require a special explanation, a
specific model, a theory of their own. In addition, their special properties
may perhaps be used for their prediction. The main mechanisms leading to
positive feedbacks, i.e., self-reinforcement, such as imitative behavior and
herding between investors are reviewed with many references provided to the
relevant literature outside the confine of Physics. Positive feedbacks provide
the fuel for the development of speculative bubbles, preparing the instability
for a major crash. We demonstrate several detailed mathematical models of
speculative bubbles and crashes. The most important message is the discovery of
robust and universal signatures of the approach to crashes. These precursory
patterns have been documented for essentially all crashes on developed as well
as emergent stock markets, on currency markets, on company stocks, and so on.
The concept of an ``anti-bubble'' is also summarized, with two forward
predictions on the Japanese stock market starting in 1999 and on the USA stock
market still running. We conclude by presenting our view of the organization of
financial markets.Comment: Latex 89 pages and 38 figures, in press in Physics Report
"Thermometers" of Speculative Frenzy
Establishing unambiguously the existence of speculative bubbles is an
on-going controversy complicated by the need of defining a model of fundamental
prices. Here, we present a novel empirical method which bypasses all the
difficulties of the previous approaches by monitoring external indicators of an
anomalously growing interest in the public at times of bubbles. From the
definition of a bubble as a self-fulfilling reinforcing price change, we
identify indicators of a possible self-reinforcing imitation between agents in
the market. We show that during the build-up phase of a bubble, there is a
growing interest in the public for the commodity in question, whether it
consists in stocks, diamonds or coins. That interest can be estimated through
different indicators: increase in the number of books published on the topic,
increase in the subscriptions to specialized journals. Moreover, the well-known
empirical rule according to which the volume of sales is growing during a bull
market finds a natural interpretation in this framework: sales increases in
fact reveal and pinpoint the progress of the bubble's diffusion throughout
society. We also present a simple model of rational expectation which maps
exactly onto the Ising model on a random graph. The indicators are then
interpreted as ``thermometers'', measuring the balance between idiosyncratic
information (noise temperature) and imitation (coupling) strength. In this
context, bubbles are interpreted as low or critical temperature phases, where
the imitation strength carries market prices up essentially independently of
fundamentals. Contrary to the naive conception of a bubble and a crash as times
of disorder, on the contrary, we show that bubbles and crashes are times where
the concensus is too strong.Comment: 15 pages + 10 figure
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