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Criticality and finite size effects in a simple realistic model of stock market

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Damien Challet
Matteo Marsili

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Abstract

We discuss a simple model based on the Minority Game which reproduces the main stylized facts of anomalous fluctuations in finance. We present the analytic solution of the model in the thermodynamic limit and show that stylized facts arise only close to a line of critical points with non-trivial properties. By a simple argument, we show that, in Minority Games, the emergence of critical fluctuations close to the phase transition is governed by the interplay between the signal to noise ratio and the system size. These results provide a clear and consistent picture of financial markets as critical systems.

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File URL: http://arxiv.org/abs/cond-mat/0210549
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File URL: http://arxiv.org/pdf/cond-mat/0210549
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Paper provided by arXiv.org in its series Quantitative Finance Papers with number cond-mat/0210549.

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Date of creation: Oct 2002
Date of revision: Dec 2002
Handle: RePEc:arx:papers:cond-mat/0210549

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  1. Lux, Thomas & Schornstein, Sascha, 2003. "Genetic learning as an explanation of stylized facts of foreign exchange markets," Economics Working Papers 2003,12, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
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  2. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
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