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Bubble Formation and Heterogeneity of Traders: A Multi-Agent Perspective

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  • Shu-Peng Chen

    ()

  • Ling-Yun He

    ()

Abstract

Financial bubble is an intensively discussed but quite controversial topic. In current literature, the researches usually focus on the (ir)rationality of traders and its impacts on the bubble. We thereby propose a completely different perspective, that is, of traders’ heterogeneity and its impacts on the formation of bubble in financial markets. As in the real financial markets, the agents are always heterogenous. For example, some of them are fundamentalists, some are chartists, some are noise traders, etc. To model the heterogeneity of agents in the real markets, we proposed a multi-agent model to control the constitution of traders. Based on four scenarios with different constitution of traders’ behaviors, we investigated three extreme situations where the market is occupied by homogeneous agents (no matter they are fundamentalists, chartists or noise traders), and one scenario where the market is made up of heterogeneous traders. By applying Log-Periodic Power-Law (LPPL) model, We studied the impacts of different investors’ behaviors on the bubble formation in the market and found that: (a) the public information has an important influence on the beginning of a bubble; (b) traders’ different expectations and their self-feedback is one of reasons for the existence of log-periodicity in bubble; (c) the existence of power–law growth and log-periodicity, which leads the probability of prediction for the bursting of bubble, is caused by the combined effects of public information, traders’ different expectations and their self-feedback. Copyright Springer Science+Business Media New York 2013

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Bibliographic Info

Article provided by Society for Computational Economics in its journal Computational Economics.

Volume (Year): 42 (2013)
Issue (Month): 3 (October)
Pages: 267-289

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Handle: RePEc:kap:compec:v:42:y:2013:i:3:p:267-289

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Web page: http://www.springerlink.com/link.asp?id=100248
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Keywords: Financial bubble; Traders’ heterogeneity; Multi-agent simulations;

References

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  1. Kenneth D. West, 1986. "A Specification Test for Speculative Bubbles," NBER Working Papers 2067, National Bureau of Economic Research, Inc.
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  6. He, Ling-Yun & Chen, Shu-Peng, 2011. "Nonlinear bivariate dependency of price–volume relationships in agricultural commodity futures markets: A perspective from Multifractal Detrended Cross-Correlation Analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(2), pages 297-308.
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  8. Thomas Lux, 2008. "Applications of Statistical Physics in Finance and Economics," Kiel Working Papers 1425, Kiel Institute for the World Economy.
  9. Ling-Yun He, 2010. "Is Price Behavior Scaling and Multiscaling in a Dealer Market? Perspectives from Multi-Agent Based Experiments," Computational Economics, Society for Computational Economics, vol. 36(3), pages 263-282, October.
  10. Chen, Shu-Peng & He, Ling-Yun, 2010. "Multifractal spectrum analysis of nonlinear dynamical mechanisms in China’s agricultural futures markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(7), pages 1434-1444.
  11. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2010. "Bubble measures in experimental asset markets," Experimental Economics, Springer, vol. 13(3), pages 284-298, September.
  12. He, Ling-Yun & Qian, Wen-Bin, 2012. "A Monte Carlo simulation to the performance of the R/S and V/S methods—Statistical revisit and real world application," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(14), pages 3770-3782.
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  15. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
  16. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
  17. He, Ling-Yun & Fan, Ying & Wei, Yi-Ming, 2009. "Impact of speculator's expectations of returns and time scales of investment on crude oil price behaviors," Energy Economics, Elsevier, vol. 31(1), pages 77-84, January.
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  19. He, Ling-Yun & Chen, Shu-Peng, 2011. "A new approach to quantify power-law cross-correlation and its application to commodity markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(21), pages 3806-3814.
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