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Microstructure Dynamics And Agent-Based Financial Markets: Can Dinosaurs Return?

Author

Listed:
  • MICHAEL KAMPOURIDIS

    (School of Computer Science and Electronic Engineering, University of Essex, Wivenhoe Park, CO4 3SQ, UK)

  • SHU-HENG CHEN

    (AI-Econ Center, Department of Economics, National Cheng Chi University, Taiwan 11623, R.O.C.)

  • EDWARD TSANG

    (Centre for Computational Finance and Economic Agents, University of Essex, Wivenhoe Park, CO4 3SQ, UK)

Abstract

This paper formalizes observations made under agent-based artificial stock market models into a concrete hypothesis, which is called the Dinosaur Hypothesis. This hypothesis states that the behavior of financial markets constantly changes and that the trading strategies in a market need to continuously co-evolve with it in order to remain effective. After formalizing the hypothesis, we suggest a testing methodology and run tests under 10 international financial markets. Our tests are based on a framework that we recently developed, which used Genetic Programming as a rule inference engine, and Self-Organizing Maps as a clustering machine for the above rules. However, an important assumption of that study was that maps among different periods were directly comparable with each other. In order to allow this to happen, we had to keep the same clusters throughout the different time periods of our experiments. Nevertheless, this assumption could be considered as strict or even unrealistic. In this paper, we relax this assumption. This makes our model more realistic. In addition, this allows us to investigate in depth the dynamics of market behavior and test for the plausibility of the Dinosaur Hypothesis. The results show that indeed markets' behavior constantly changes. As a consequence, strategies need to continuously co-evolve with the market; if they do not, they become obsolete or dinosaurs.

Suggested Citation

  • Michael Kampouridis & Shu-Heng Chen & Edward Tsang, 2012. "Microstructure Dynamics And Agent-Based Financial Markets: Can Dinosaurs Return?," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(supp0), pages 1-27.
    • Handle: RePEc:wsi:acsxxx:v:15:y:2012:i:supp0:n:s0219525912500609
    DOI: 10.1142/S0219525912500609
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    References listed on IDEAS

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    1. W. Brian Arthur, 1992. "On Learning and Adaptation in the Economy," Working Paper 854, Economics Department, Queen's University.
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    1. Andre Veski & Kaire Põder, 2016. "Strategies in the Tallinn School Choice Mechanism," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 8(1).

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