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38
Volatility clustering in financial markets: Empirical facts and agent based models
, 2004
"... Summary. Time series of financial asset returns often exhibit the volatility clustering property: large changes in prices tend to cluster together, resulting in persistence of the amplitudes of price changes. After recalling various methods for quantifying and modeling this phenomenon, we discuss se ..."
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Summary. Time series of financial asset returns often exhibit the volatility clustering property: large changes in prices tend to cluster together, resulting in persistence of the amplitudes of price changes. After recalling various methods for quantifying and modeling this phenomenon, we discuss several economic mechanisms which have been proposed to explain the origin of this volatility clustering in terms of behavior of market participants and the news arrival process. A common feature of these models seems to be a switching between low and high activity regimes with heavytailed durations of regimes. Finally, we discuss a simple agentbased model which links such variations in market activity to threshold behavior of market participants and suggests a link between volatility clustering and investor inertia. 1
Long range dependence in financial markets
 Fractals in Engineering
"... The notions of selfsimilarity, scaling, fractional processes and long range dependence have been repeatedly used to describe properties of financial time series: stock prices, foreign exchange rates, market indices and commodity prices. We discuss the relevance of these concepts in the context of ..."
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Cited by 14 (0 self)
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The notions of selfsimilarity, scaling, fractional processes and long range dependence have been repeatedly used to describe properties of financial time series: stock prices, foreign exchange rates, market indices and commodity prices. We discuss the relevance of these concepts in the context of financial modelling, their relation with the basic principles of financial theory and possible economic explanations for their presence in financial time series.
Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments.
 American Economic Journal: Microeconomics, forthcoming.
, 2012
"... This is PRELIMINARY version of the paper. Please do not quote it without the authors' permission. Abstract We construct a model of evolutionary or reinforcement learning, where boundedly rational agents choose from a few simple rules for price prediction, such as naive, adaptive or trend follo ..."
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Cited by 11 (4 self)
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This is PRELIMINARY version of the paper. Please do not quote it without the authors' permission. Abstract We construct a model of evolutionary or reinforcement learning, where boundedly rational agents choose from a few simple rules for price prediction, such as naive, adaptive or trend following expectations. Agents update their active rule by evolutionary selection based upon forecasting errors. Simulations show that after some initial learning phase, coordination on a common rule occurs. Which rule survives evolutionary selection depends on the initial conditions, particularly on the price pattern in the first few periods and the initial shares of agents attached to the rules. Consequently, evolutionary learning exhibits path dependence and different patterns of realized prices are generated, explaining the results of the recent experiment on expectations formation in a standard asset pricing setting (Hommes, Sonnemans, Tuinstra and Van de Velden, 2005). Tuning the parameters, these patterns can be made both qualitatively and quantitatively close to those observed in the experiments. We thus provide an explanation of the experimental findings using a low dimensional nonlinear deterministic model with few parameters.
A Threshold Model of Investor Psychology
"... We introduce a class of agentbased market models founded upon simple descriptions of investor psychology. Agents are subject to various psychological tensions induced by market conditions, and endowed with a minimal ‘personality’. This personality consists of a threshold level for each of the tensi ..."
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Cited by 7 (3 self)
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We introduce a class of agentbased market models founded upon simple descriptions of investor psychology. Agents are subject to various psychological tensions induced by market conditions, and endowed with a minimal ‘personality’. This personality consists of a threshold level for each of the tensions being modeled, and the agent reacts whenever a tension threshold is reached. This paper considers an elementary model including just two such tensions. The first is ‘cowardice’, which is the stress caused by remaining in a minority position with respect to overall market sentiment, and leads to herdingtype behaviour. The second is ‘inaction’, which is the increasing desire to act or reevaluate one’s investment position. There is no inductive learning by agents, and they are only coupled via the global market price and overall market sentiment. Even incorporating just these two psychological tensions, important stylized facts of real market data, including fattails, excess kurtosis, uncorrelated price returns and clustered volatility over the timescale of a few days, are reproduced. By then introducing an additional parameter that amplifies the effect of externally generated market noise during times of extreme market sentiment, longtime volatility correlations can also be recovered.
Herding effects in order driven markets: the rise and fall of gurus
, 2010
"... We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure is endogenous and evolves using a fitness mechanism based on agents wealth. We assess how imitations among otherway noise traders, can give rise to ..."
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Cited by 6 (4 self)
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We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure is endogenous and evolves using a fitness mechanism based on agents wealth. We assess how imitations among otherway noise traders, can give rise to herd behaviour and how this behaviour affects asset prices. We show how price paths are strongly biased in the direction of the herd. Using a fitness mechanism then we study under which conditions a guru may rise and fall over time and his ability to manipulate the market. So purchases by guru may trigger sufficient purchases by imitators to allow the guru to make profit. In this setting we study the wealth distribution of guru, imitators and noimitators. 1 1
Asset prices, traders behavior and market design
 Journal of Economic Dynamics and Control
, 2009
"... The dynamics in a financial market with heterogeneous agents is analyzed under different market architectures. We start with a tractable behavioral model under Walrasian market clearing and simulate it under more realistic trading protocols. The key behavioral feature of the model is the switching ..."
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Cited by 5 (0 self)
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The dynamics in a financial market with heterogeneous agents is analyzed under different market architectures. We start with a tractable behavioral model under Walrasian market clearing and simulate it under more realistic trading protocols. The key behavioral feature of the model is the switching of agents between simple forecasting rules on the basis of fitness measure. Analyzing the dynamics under orderdriven protocols we show that behavioral and structural assumptions of the model are closely intertwined. High responsiveness of agents to a fitness measure causes excess volatility, however the frictions of the orderdriven markets may stabilize the dynamics. We also analyze and compare allocative efficiency and time series properties under different protocols. ∗An earlier version of this paper was prepared while Mikhail Anufriev was visiting UNSW, whose hospitality he gratefully acknowledges. We wish to thank all the participants of the Symposium on AgentBased Computational Methods in Economics and Finance in Aalborg, of the Workshop on “Complexity in Economics and Finance ” in Leiden, and of the seminars in Amsterdam, Pisa, Sydney and Trieste for useful comments and stimulating questions. We especially thank Giulio Bottazzi, Buz Brock, Cars Hommes and Florian Wagener for providing very detailed comments during different stages of the work. We acknowledge financial support from the Complex Markets E.U. STREP project 516446 under FP62003NESTPATH1. The usual disclaimers apply.
Optimal Monetary Policy under Heterogeneous Expectations
"... Monetary policy has an important role in the determination of the inflation rate and the output gap time trajectories. Monetary authorities should choose the nominal interest rate time path that best serves the goals of price stability (primarily) and output growth (as a consequence of the first). I ..."
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Cited by 4 (2 self)
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Monetary policy has an important role in the determination of the inflation rate and the output gap time trajectories. Monetary authorities should choose the nominal interest rate time path that best serves the goals of price stability (primarily) and output growth (as a consequence of the first). In this paper it is presented a framework under which an optimal interest rate rule is computed, and this rule is found to be stabilizing. The stability result is true for a homogeneous expectations scenario, where all individuals believe that inflation converges to a long run low level. Introducing expectations heterogeneity under a bounded rationality – discrete choice setup, this result continues to hold, but now we cannot exclude periods of strong price instability that, nevertheless, do not tend to persist for long periods of time.
2006): A behavioral asset pricing model with a timevarying second moment,Chaos
 Solitons & Fractals
"... ABSTRACT. We develop a simple behavioral asset pricing model with fundamentalists and chartists in order to study price behavior in financial markets when chartists estimate both conditional mean and variance by using a weighted averaging process. Through a stability, bifurcation, and normal form a ..."
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Cited by 3 (1 self)
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ABSTRACT. We develop a simple behavioral asset pricing model with fundamentalists and chartists in order to study price behavior in financial markets when chartists estimate both conditional mean and variance by using a weighted averaging process. Through a stability, bifurcation, and normal form analysis, the market impact of the weighting process and time varying second moment are examined. It is found that the fundamental price becomes stable (unstable) when the activities from both types of traders are balanced (unbalanced). When the fundamental price becomes unstable, the weighting process leads to different price dynamics, depending on whether the chartists act as either trend followers or contrarians. It is also found that a time varying second moment of the chartists does not change the stability of the fundamental price, but it does influence the stability of the bifurcations. The bifurcation becomes stable (unstable) when the chartists are more (less) concerned about the market risk characterized by the time varying second moment. Different routes to complicated price dynamics are also observed. The analysis provides an analytical foundation for the statistical analysis of the corresponding stochastic version of this type of behavioral model.
Chapter 1. Some methods for the global analysis of closed invariant curves in twodimensional maps
 In Business Cycle Dynamics – Models and
, 2006
"... It is well known that models of nonlinear oscillators applied to the study of the business cycle can be formulated both as continuos or discrete time dynamic models (see e.g. [23], [33], [34]). However, economic time is often discontinuous (discrete) because decisions in economics cannot be con ..."
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It is well known that models of nonlinear oscillators applied to the study of the business cycle can be formulated both as continuos or discrete time dynamic models (see e.g. [23], [33], [34]). However, economic time is often discontinuous (discrete) because decisions in economics cannot be con