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A re-examination of the “zero is enough” hypothesis in the emergence of financial stylized facts

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  • Olivier Brandouy

    ()

  • Angelo Corelli

    ()

  • Iryna Veryzhenko

    ()

  • Roger Waldeck

    ()

Abstract

In recent years, a growing literature has claimed that the market microstructure is sufficient to generate the so-called stylized facts without any reference to the behaviour of market players. Indeed, qualitative stylized-facts can be generated with zero-intelligence traders (ZITs) but we stress that they are without any quantitative predictive power. In this paper we show that in most of the cases, such qualitative stylized facts hide unrealistic price motions at the intraday level and ill-calibrated return processes as well. To generate realistic price motions and return series with adequate quantitative values is out-of-reach using pure ZIT populations. To do so, one must increasingly constrain agents’ choices to a point where it is hard to claim that their behaviour is completely random. In addition we show that even with highly constrained ZIT agents, one cannot reproduce real time series from these. Except in a few cases, first order moments of ZITs never equal real data ones. We therefore claim that stylized facts produced by means of ZIT agents are useless for financial engineering. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s11403-012-0099-0
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Bibliographic Info

Article provided by Springer in its journal Journal of Economic Interaction and Coordination.

Volume (Year): 7 (2012)
Issue (Month): 2 (October)
Pages: 223-248

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Handle: RePEc:spr:jeicoo:v:7:y:2012:i:2:p:223-248

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Web page: http://www.springer.com/economics/economic+theory/journal/11403

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Related research

Keywords: Agent based modelling; Time series analysis; Financial markets; Heterogeneity of agents; Market microstructure;

References

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  1. Duffy, John, 2006. "Agent-Based Models and Human Subject Experiments," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 19, pages 949-1011 Elsevier.
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  11. Ladley, Dan & Schenk-Hoppé, Klaus Reiner, 2009. "Do stylised facts of order book markets need strategic behaviour?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 817-831, April.
  12. J. Doyne Farmer & Paolo Patelli & Ilija I. Zovko, 2003. "The Predictive Power of Zero Intelligence in Financial Markets," Papers cond-mat/0309233, arXiv.org, revised Feb 2004.
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