Testing for non-linear structure in an artificial financial market
We present a stochastic simulation model of a prototype financial market. Our market is populated by both noise traders and fundamentalist speculators. The dynamics covers switches in the prevailing mood among noise traders (optimistic or pessimistic) as well as switches of agents between the noise traders and fundamentalist group in response to observed differences in profits. The particular behavioral variant adopted by an agent also determines her decision to enter on the long or the short side of the market. Short-run imbalances between demand and supply lead to price adjustments by a market maker or auctioneer in the usual Walrasian manner. Our interest in this paper is in exploring the behavior of the model when testing for the presence of chaos or non-linearity in the simulated data. First, attempts to determine the fractal dimension of the underlying process give unsatisfactory results in that we experience a lack of convergence of the estimate. Explicit tests for non-linearity and dependence (the BDS and Kaplan tests) also give very unstable results in that both acceptance and strong rejection of IIDness can be found in different realizations of our model. All in all, this behavior is very similar to experience collected with empirical data and our results may point towards an explanation of why robustness of inference in this area is low. However, when testing for dependence in second moments and estimating GARCH models, the results appear much more robust and the chosen GARCH specification closely resembles the typical outcome of empirical studies.
(This abstract was borrowed from another version of this item.)
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Youssefmir, Michael & Huberman, Bernardo A., 1997. "Clustered volatility in multiagent dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 101-118, January.
- William A. Barnett & A. Ronald Gallant & Melvin J. Hinich & Jochen A. Jungeilges & Daniel T. Kaplan & Mark J. Jensen, 1996.
"A Single-Blind Controlled Competition among Tests for Nonlinearity and Chaos,"
9602005, EconWPA, revised 20 Sep 1996.
- Barnett, William A. & Gallant, A. Ronald & Hinich, Melvin J. & Jungeilges, Jochen A. & Kaplan, Daniel T. & Jensen, Mark J., 1997. "A single-blind controlled competition among tests for nonlinearity and chaos," Journal of Econometrics, Elsevier, vol. 82(1), pages 157-192.
- William Barnett & A. Ronald Gallant & Melvin J. Hinich & Jochen A. Jungeilges & Daniel T. Kaplan & Mark J. Jensen, 2012. "A Single-Blind Controlled Competition Among Tests For Nonlinearity And Chaos," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201219, University of Kansas, Department of Economics, revised Sep 2012.
- Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May.
- Day, Richard H. & Huang, Weihong, 1990.
"Bulls, bears and market sheep,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 14(3), pages 299-329, December.
- Gilmore, Claire G., 1993. "A new test for chaos," Journal of Economic Behavior & Organization, Elsevier, vol. 22(2), pages 209-237, October.
- Murray Frank & Thanasis Stengos, 1989. "Measuring the Strangeness of Gold and Silver Rates of Return," Review of Economic Studies, Oxford University Press, vol. 56(4), pages 553-567.
- Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
- Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
- Ching-Wei Tan, 1999. "Estimating the Complexity Function of Financial Time Series: An Estimation Based on Predictive Stochastic Complexity," Computing in Economics and Finance 1999 1143, Society for Computational Economics.
- De Vries, C.G. & Leuven, K.U., 1994. "Stylized Facts of Nominal Exchange Rate Returns," Papers 94-002, Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER).
- Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
When requesting a correction, please mention this item's handle: RePEc:eee:jeborg:v:46:y:2001:i:3:p:327-342. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.