Linking agent-based models and stochastic models of financial markets.

Proceedings of the National Academy of Sciences of the United States of America
Ling FengH Eugene Stanley

Abstract

It is well-known that financial asset returns exhibit fat-tailed distributions and long-term memory. These empirical features are the main objectives of modeling efforts using (i) stochastic processes to quantitatively reproduce these features and (ii) agent-based simulations to understand the underlying microscopic interactions. After reviewing selected empirical and theoretical evidence documenting the behavior of traders, we construct an agent-based model to quantitatively demonstrate that "fat" tails in return distributions arise when traders share similar technical trading strategies and decisions. Extending our behavioral model to a stochastic model, we derive and explain a set of quantitative scaling relations of long-term memory from the empirical behavior of individual market participants. Our analysis provides a behavioral interpretation of the long-term memory of absolute and squared price returns: They are directly linked to the way investors evaluate their investments by applying technical strategies at different investment horizons, and this quantitative relationship is in agreement with empirical findings. Our approach provides a possible behavioral explanation for stochastic models for financial systems in gener...Continue Reading

References

Nov 23, 2000·Physical Review. E, Statistical Physics, Plasmas, Fluids, and Related Interdisciplinary Topics·V Plerou Eugene Stanley H
Apr 6, 2001·Physical Review Letters·Y AshkenazyH E Stanley
Apr 24, 2002·Physical Review. E, Statistical Physics, Plasmas, Fluids, and Related Interdisciplinary Topics·P GopikrishnanH E Stanley
May 16, 2002·Proceedings of the National Academy of Sciences of the United States of America·Cars H Hommes
Sep 21, 2002·Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics·Vasiliki PlerouH Eugene Stanley
May 16, 2003·Nature·Xavier GabaixH Eugene Stanley
Jun 4, 2008·Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics·Vasiliki Plerou, H Eugene Stanley
Dec 19, 2009·Proceedings of the National Academy of Sciences of the United States of America·Boris PodobnikH Eugene Stanley
Oct 13, 2010·Proceedings of the National Academy of Sciences of the United States of America·Boris PodobnikH Eugene Stanley
Oct 19, 2011·Proceedings of the National Academy of Sciences of the United States of America·Boris PodobnikH Eugene Stanley
Apr 7, 2012·Scientific Reports·Tobias PreisSteven R Bishop

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Citations

Jan 15, 2014·PloS One·Mario A BertellaHarry Eugene Stanley
Jul 17, 2014·PloS One·Vygintas Gontis, Aleksejus Kononovicius
Mar 19, 2014·PloS One·Huishu ZhangJiping Huang
Jul 3, 2013·Scientific Reports·Dror Y KenettGitit Gur-Gershgoren
Sep 4, 2015·PloS One·Federico BottaTobias Preis
Dec 2, 2014·PloS One·Calum BrownMark D Rounsevell
Mar 24, 2016·PloS One·Christopher M Wray, Steven R Bishop
Feb 12, 2015·Scientific Reports·Jun-Jie ChenBo Zheng
Dec 21, 2013·Scientific Reports·Merve AlanyaliTobias Preis
Nov 6, 2013·Scientific Reports·Tobias PreisH Eugene Stanley
Aug 22, 2013·Scientific Reports·Luo-Luo Jiang, Matjaž Perc
Oct 20, 2012·Scientific Reports·Tobias PreisEshel Ben-Jacob
Mar 3, 2018·PloS One·Lucas Fievet, Didier Sornette
Nov 28, 2012·Scientific Reports·Zeyu ZhengBaowen Li
May 31, 2014·Reports on Progress in Physics·Didier Sornette
Jan 20, 2018·Physical Review. E·Paloma O C XavierA R Bosco de Magalhães
Apr 16, 2020·Physical Review. E·Antonio M PuertasF Javier de Las Nieves

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