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Scaling and Criticality in a Stochastic Multi-Agent Model of a Financial Market


Author Info

  • Lux, T.
  • M. Marchesi


This paper reports statistical analyses performed on simulated data from a stochastic multi-agent model of speculative behaviour in a financial market. The price dynamics resulting from this artificial market process exhibits the same type of scaling laws as do empirical data from stock markets and foreign exchange markets: (i) one observes scaling in the probability distribution of relative price changes with a Pareto exponent around 2.6, (ii) volatility shows significant long-range correlation with a self-similarity parameter H around 0.85. This happens although we assume that news about the intrinsic or fundamental value of the asset follows a white noise process and, hence, incorporation of news about fundamental factors is insufficient to explain either of the characteristics (i) or (ii). As a consequence, in our model, the main stylised facts of financial data originate from the working of the market itself and one need not resort to scaling in unobservable extraneous signals as an explanation of the source of scaling in financial prices. The emergence of power laws can be explained by the existence of a critical state which is repeatedly approached in the course of the system's development.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number 438.

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Length: pages
Date of creation:
Date of revision: Jul 1998
Handle: RePEc:bon:bonsfb:438

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Related research

Keywords: scaling; criticality; interacting agents;

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