Asset price dynamics with small world interactions under hetereogeneous beliefs
AbstractWe propose a simple model of a financial market populated with heterogeneous agents. The market represents a network with nodes symbolizing the agents and edges standing for connections between them, thus, embodying local interactions in the market. By local interactions we mean any kind of interplay between the decisions of the agents unaffected by the market mechanism and unrelated to the physical distance between the agents. Using the rewiring procedure we restructure a network from regular lattice to random graph by varying the probability of the agents to switch from one trading strategy to another. We study how the network structure influences the asset price dynamics. The results show that for some intermediate values of the probability to switch, corresponding to a small world network, the price dynamics become reminiscent to the real. While for the boundary values of the probability the dynamics lacks some typical features of the real financial markets.
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Bibliographic InfoPaper provided by Department of Applied Mathematics, Università Ca' Foscari Venezia in its series Working Papers with number 149.
Length: 21 pages
Date of creation: Mar 2007
Date of revision:
local interactions; networks; small world; heterogeneous beliefs; price dynamics; bifurcations; chaos;
Find related papers by JEL classification:
- C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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