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Emergence of speculation in a hierarchical agent-based model

Author

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  • Meine, David C.A.
  • Vvedensky, Dimitri D.

Abstract

The Lux–Marchesi model has been modified to include hierarchical interactions to enable the examination of the effect of hierarchies on the formation of speculative bubbles. The Lux–Marchesi model includes two types of traders: fundamentalists and chartists, with the latter classified as either optimists or pessimists. The stock price is then determined by the number of fundamentalists and chartists who drive the supply and demand for the stock. This model produces volatility clustering and fat-tailed distributions seen in actual markets. Hierarchical interactions are based on communications between traders which successively influence higher levels of the hierarchy up to investment banks, governments, and currency blocks. The combination of the two models reproduces known characteristics of stock markets, including spontaneous bubbles and crashes. For certain hierarchy strengths, traders tend to a uniform opinion and an emergence of speculation can be observed. In this regime crashes happen.

Suggested Citation

  • Meine, David C.A. & Vvedensky, Dimitri D., 2023. "Emergence of speculation in a hierarchical agent-based model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 620(C).
    • Handle: RePEc:eee:phsmap:v:620:y:2023:i:c:s0378437123001747
    DOI: 10.1016/j.physa.2023.128619
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