Heterogeneous Beliefs, Intelligent Agents, and Allocative Efficiency in an Artificial Stock Market
AbstractVarious studies of asset markets have shown that traders are capable of learning. In this paper we replace human traders with artificial-intelligent software agents in a simulated stock market. They make predictions about the future, randomly submit their quotes, and transact at certain price. A simplified double auction market mechanism is employed. Three types of agents are included, value traders, momentum traders, and noise traders. Value traders form future expectation with an artificial neural network (ANN). They use ANN to predict dividend growth rate. Three computational experiments in terms of market participants are conducted. Time series from this market are analyzed from the standpoint of well-known empirical features in real markets, including GARCH, CAPM, and EMH tests. I extend earlier research in three ways. First, I employ a double auction market mechanism. I use this mechanism for two reasons. First, major real financial markets are organized as double auctions. Second, laboratory double auctions with human traders are known to yield data that approximate the equilibrium predictions of economic theory in a variety of environments. My second contribution is that I do not focus solely on equilibrium selection and convergence. I emphasize the behavior of the learning and market dynamics themselves. I analyze the portfolio returns and stock returns from this market to see whether the market exhibits characteristics cited in the empirical literature, including volatility persistence, GARCH, portfolio performance evaluation and allocative efficiency. The third extension is that I introduce the noise trader. The noise trader does not act strategically, but rather randomly posts a market order, and the resulting trade quantity is a randomly distributed variable.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 612.
Date of creation: 01 Mar 1999
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-1999-07-12 (All new papers)
- NEP-EVO-1999-07-12 (Evolutionary Economics)
- NEP-FIN-1999-07-12 (Finance)
- NEP-IND-1999-07-12 (Industrial Organization)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990.
"Noise Trader Risk in Financial Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 98(4), pages 703-38, August.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
- repec:att:wimass:9520 is not listed on IDEAS
- Kocherlakota, N., 1995.
"The Equity Premium: It's Still a Puzzle,"
95-05, University of Iowa, Department of Economics.
- Narayana R. Kocherlakota, 1995. "The equity premium: it's still a puzzle," Discussion Paper / Institute for Empirical Macroeconomics 102, Federal Reserve Bank of Minneapolis.
- Kurz, Mordecai, 1994. "On Rational Belief Equilibria," Economic Theory, Springer, vol. 4(6), pages 859-76, October.
- John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
- Forsythe, Robert & Palfrey, Thomas R. & Plott, Charles R., .
"Asset Valuation in an Experimental Market,"
299, California Institute of Technology, Division of the Humanities and Social Sciences.
- Plott, Charles R. & Sunder, Shyam., .
"Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets,"
463, California Institute of Technology, Division of the Humanities and Social Sciences.
- Plott, Charles R & Sunder, Shyam, 1988. "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Econometrica, Econometric Society, vol. 56(5), pages 1085-1118, September.
- Sanford Grossman, 1989. "The Informational Role of Prices," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572141, June.
- Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992.
" Simple Technical Trading Rules and the Stochastic Properties of Stock Returns,"
Journal of Finance,
American Finance Association, vol. 47(5), pages 1731-64, December.
- Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
- Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
- Brock, William A. & Hommes, Cars H., 1998.
"Heterogeneous beliefs and routes to chaos in a simple asset pricing model,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 22(8-9), pages 1235-1274, August.
- repec:att:wimass:9118 is not listed on IDEAS
- Arifovic, Jasmina, 1996. "The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 510-41, June.
- Brock, William A & LeBaron, Blake D, 1996.
"A Dynamic Structural Model for Stock Return Volatility and Trading Volume,"
The Review of Economics and Statistics,
MIT Press, vol. 78(1), pages 94-110, February.
- William A. Brock & Blake D. LeBaron, 1995. "A Dynamic Structural Model for Stock Return Volatility and Trading Volume," NBER Working Papers 4988, National Bureau of Economic Research, Inc.
- Blake LeBaron, .
"Technical Trading Rules and Regime Shifts in Foreign Exchange,"
_007, University of Wisconsin - Madison.
- Lettau, Martin, 1997. "Explaining the facts with adaptive agents: The case of mutual fund flows," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1117-1147, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.