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On the nature of the stock market: Simulations and experiments

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Author Info
Hendrik J. Blok
Abstract

In this dissertation two simple models of stock exchange are developed and simulated numerically. The first is characterized by centralized trading with a market maker. Unfortunately, this model is unable to generate realistic market dynamics. The second model discards the requirement of centralized trading. Under variation of the control parameter the model exhibits two phase transitions: both a first- and a second-order (critical). The decentralized model is able to capture many of the interesting properties observed in empirical markets. Significantly, these properties only emerge when the parameters are tuned such that the model spans the critical point. This suggests that real markets may operate at or near a critical point, but is unable to explain why this should be. One of the main points of the thesis is that these empirical phenomena are not present in the stochastic driving force, but emerge endogenously from interactions between agents.

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Paper provided by arXiv.org in its series Quantitative Finance Papers with number cond-mat/0010211.

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Date of creation: Oct 2000
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Handle: RePEc:arx:papers:cond-mat/0010211

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  1. V. Plerou & P. Gopikrishnan & L. A. N. Amaral & M. Meyer & H. E. Stanley, 1999. "Scaling of the distribution of price fluctuations of individual companies," Quantitative Finance Papers cond-mat/9907161, arXiv.org. [Downloadable!]
  2. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-55, January. [Downloadable!] (restricted)
  3. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-85, May. [Downloadable!] (restricted)
  4. Rama Cont & Marc Potters & Jean-Philippe Bouchaud, 1997. "Scaling in stock market data: stable laws and beyond," Quantitative Finance Papers cond-mat/9705087, arXiv.org. [Downloadable!]
  5. Parameswaran Gopikrishnan & Vasiliki Plerou & Luis A. Nunes Amaral & Martin Meyer & H. Eugene Stanley, 1999. "Scaling of the distribution of fluctuations of financial market indices," Quantitative Finance Papers cond-mat/9905305, arXiv.org. [Downloadable!]
  6. Brown, David P & Zhang, Zhi Ming, 1997. " Market Orders and Market Efficiency," Journal of Finance, American Finance Association, vol. 52(1), pages 277-308, March. [Downloadable!] (restricted)
  7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  8. Sergei Maslov & Yi-Cheng Zhang, 1998. "Optimal Investment Strategy for Risky Assets," Quantitative Finance Papers cond-mat/9801240, arXiv.org. [Downloadable!]
  9. C. Busshaus & H. Rieger, 1999. "A prognosis oriented microscopic stock market model," Quantitative Finance Papers cond-mat/9903079, arXiv.org. [Downloadable!]
  10. Barry G. Lawson & Steve Park, 2000. "Asynchronous Time Evolution in an Artificial Society Model," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 3. [Downloadable!]
  11. Rama Cont & Marc Potters & Jean-Philippe Bouchaud, 1997. "Scaling in stock market data: stable laws and beyond," Science & Finance (CFM) working paper archive 9705087, Science & Finance, Capital Fund Management. [Downloadable!]
  12. Yanhui Liu & Pierre Cizeau & Martin Meyer & Chung-Kang Peng & H. Eugene Stanley, 1997. "Correlations in Economic Time Series," Quantitative Finance Papers cond-mat/9706021, arXiv.org. [Downloadable!]
  13. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, vol. 59(5), pages 1279-313, September. [Downloadable!] (restricted)
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  14. Weron, Rafal, 1996. "On the Chambers-Mallows-Stuck method for simulating skewed stable random variables," Statistics & Probability Letters, Elsevier, vol. 28(2), pages 165-171, June. [Downloadable!] (restricted)
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