Agent-Based Models of Financial Markets.Pdf
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IOP PUBLISHING Rep. Prog. Phys. 70 (2007) 409–450
REPORTS ON PROGRESS IN PHYSICS doi:10.1088/0034-4885/70/3/R03
Agent-based models of financial markets
E Samanidou1,4 , E Zschischang2 , D Stauffer3 and T Lux1 Department of Economics, University of Kiel, Olshausenstrasse 40, D-24118 Kiel, Germany 2 HSH Nord Bank, Portfolio Mngmt. & Inv., Martensdamm 6, D-24103 Kiel, Germany 3 Institute for Theoretical Physics, Cologne University, D-50923 K¨ ln, Germany o Received 6 November 2006, in final form 19 November 2006 Published 13 February 2007 Online at stacks.iop.org/RoPP/70/409
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Abstract This review deals with several microscopic (‘agent-based’) models of financial markets which have been studied by economists and physicists over the last decade: Kim–Markowitz, Levy–Levy–Solomon, Cont–Bouchaud, Solomon–Weisbuch, Lux–Marchesi, Donangelo– Sneppen and Solomon–Levy–Huang. After an overview of simulation approaches in financial economics, we first give a summary of the Donangelo–Sneppen model of monetary exchange and compare it with related models in economics literature. Our selective review then outlines the main ingredients of some influential early models of multi-agent dynamics in financial markets (Kim–Markowitz, Levy–Levy–Solomon). As will be seen, these contributions draw their inspiration from the complex appearance of investors’ interactions in real-life markets. Their main aim is to reproduce (and, thereby, provide possible explanations) for the spectacular bubbles and crashes seen in certain historical episodes, but they lack (like almost all the work before 1998 or so) a perspective in terms of the universal statistical features of financial time series. In fact, awareness of a set of such regularities (power-law tails of the distribution of returns, temporal scaling of volatility) only gradually appeared over the nineties. With the more precise description of the formerly relatively vague characteristics (e.g. moving from the notion of fat tails to the more...
REPORTS ON PROGRESS IN PHYSICS doi:10.1088/0034-4885/70/3/R03
Agent-based models of financial markets
E Samanidou1,4 , E Zschischang2 , D Stauffer3 and T Lux1 Department of Economics, University of Kiel, Olshausenstrasse 40, D-24118 Kiel, Germany 2 HSH Nord Bank, Portfolio Mngmt. & Inv., Martensdamm 6, D-24103 Kiel, Germany 3 Institute for Theoretical Physics, Cologne University, D-50923 K¨ ln, Germany o Received 6 November 2006, in final form 19 November 2006 Published 13 February 2007 Online at stacks.iop.org/RoPP/70/409
1
Abstract This review deals with several microscopic (‘agent-based’) models of financial markets which have been studied by economists and physicists over the last decade: Kim–Markowitz, Levy–Levy–Solomon, Cont–Bouchaud, Solomon–Weisbuch, Lux–Marchesi, Donangelo– Sneppen and Solomon–Levy–Huang. After an overview of simulation approaches in financial economics, we first give a summary of the Donangelo–Sneppen model of monetary exchange and compare it with related models in economics literature. Our selective review then outlines the main ingredients of some influential early models of multi-agent dynamics in financial markets (Kim–Markowitz, Levy–Levy–Solomon). As will be seen, these contributions draw their inspiration from the complex appearance of investors’ interactions in real-life markets. Their main aim is to reproduce (and, thereby, provide possible explanations) for the spectacular bubbles and crashes seen in certain historical episodes, but they lack (like almost all the work before 1998 or so) a perspective in terms of the universal statistical features of financial time series. In fact, awareness of a set of such regularities (power-law tails of the distribution of returns, temporal scaling of volatility) only gradually appeared over the nineties. With the more precise description of the formerly relatively vague characteristics (e.g. moving from the notion of fat tails to the more...