37,003 research outputs found
Using realistic trading strategies in an agent-based stock market model
The use of agent-based models (ABMs) has increased in the last years to simulate social systems and, in particular, financial markets. ABMs of financial markets are usually validated by checking the ability of the model to reproduce a set of empirical stylised facts. However, other common-sense evidence is available which is often not taken into account, ending with models which are valid but not sensible. In this paper we present an ABM of a stock market which incorporates this type of common-sense evidence and implements realistic trading strategies based on practitioners literature. We next validate the model using a comprehensive approach consisting of four steps: assessment of face validity, sensitivity analysis, calibration and validation of model outputs
The price dynamics of common trading strategies
A deterministic trading strategy can be regarded as a signal processing
element that uses external information and past prices as inputs and
incorporates them into future prices. This paper uses a market maker based
method of price formation to study the price dynamics induced by several
commonly used financial trading strategies, showing how they amplify noise,
induce structure in prices, and cause phenomena such as excess and clustered
volatility.Comment: 29 pages, 12 figure
Evolution and anti-evolution in a minimal stock market model
We present a novel microscopic stock market model consisting of a large
number of random agents modeling traders in a market. Each agent is
characterized by a set of parameters that serve to make iterated predictions of
two successive returns. The future price is determined according to the offer
and the demand of all agents. The system evolves by redistributing the capital
among the agents in each trading cycle. Without noise the dynamics of this
system is nearly regular and thereby fails to reproduce the stochastic return
fluctuations observed in real markets. However, when in each cycle a small
amount of noise is introduced we find the typical features of real financial
time series like fat-tails of the return distribution and large temporal
correlations in the volatility without significant correlations in the price
returns. Introducing the noise by an evolutionary process leads to different
scalings of the return distributions that depend on the definition of fitness.
Because our realistic model has only very few parameters, and the results
appear to be robust with respect to the noise level and the number of agents we
expect that our framework may serve as new paradigm for modeling self generated
return fluctuations in markets.Comment: 13 pages, 5 figure
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
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