Evolutionary dynamics in financial markets with many trader types

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Evolutionary dynamics in financial markets with many trader types

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W.A. Brock, C.H. Hommes and F.O.O. Wagener

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Abstract

This paper develops the notion of a Large Type Limit (LTL) describing the average behavior of adaptive evolutionary systems with many trader types. It is shown that generic and persistent features of adaptive evolutionary systems with many trader types are well described by the large type limit. Stability and bifurcation routes to instability and strange attractors are studied. An increase in the "intensity of adaption" or in the diversity of beliefs may lead to deviations from the RE fundamental benchmark and excess volatility. Simple examples of LTL are able to generate important stylized facts, such as volatility clustering and long memory, observed in real financial data.

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Publisher Info
Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 119.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:119

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Paper
- Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2001. "Evolutionary Dynamics in Financial Markets With Many Trader Types," CeNDEF Working Papers 01-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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