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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Paper provided by University of Bonn, Germany in its series Discussion Paper Serie B with number
438.
Length: pages Date of creation: Date of revision:
Jul 1998 Handle: RePEc:bon:bonsfb:438
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Find related papers by JEL classification: C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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