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Market Ecology, Pareto Wealth Distribution and Leptokurtic Returns in Microscopic Simulation of the LLS Stock Market Model

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  • Sorin Solomon
  • Moshe Levy

Abstract

The LLS stock market model is a model of heterogeneous quasi-rational investors operating in a complex environment about which they have incomplete information. We review the main features of this model and several of its extensions. We study the effects of investor heterogeneity and show that predation, competition, or symbiosis may occur between different investor populations. The dynamics of the LLS model lead to the empirically observed Pareto wealth distribution. Many properties observed in actual markets appear as natural consequences of the LLS dynamics: truncated Levy distribution of short-term returns, excess volatility, a return autocorrelation "U-shape" pattern, and a positive correlation between volume and absolute returns.

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File URL: http://arxiv.org/pdf/cond-mat/0005416
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Paper provided by arXiv.org in its series Papers with number cond-mat/0005416.

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Date of creation: May 2000
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Handle: RePEc:arx:papers:cond-mat/0005416

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  1. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 246-73, April.
  2. Levy, Moshe & Levy, Haim & Solomon, Sorin, 1994. "A microscopic model of the stock market : Cycles, booms, and crashes," Economics Letters, Elsevier, vol. 45(1), pages 103-111, May.
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Cited by:
  1. C. García & J. García Pérez & J. Dorp, 2011. "Modeling heavy-tailed, skewed and peaked uncertainty phenomena with bounded support," Statistical Methods and Applications, Springer, vol. 20(4), pages 463-486, November.
  2. Youwei Li & Bas Donkers, 2004. "The Econometric Analysis of Microscopic Simulation Models," Computing in Economics and Finance 2004, Society for Computational Economics 195, Society for Computational Economics.
  3. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "An Empirical Analysis of the Network Structure of the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 7, pages 77-87.

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