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Market Statistics Of A Psychology-Based Heterogeneous Agent Model

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    (Department of Mathematical Sciences, George Mason University, MS 3F2, 4400 University Drive, Fairfax, VA 22030, USA)



    (Natural Science and Mathematics Division, NVCC, 15200 Neabsco Mills Road, Woodbridge, VA 22191, USA)

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    We continue an investigation into a class of agent-based market models that are motivated by a psychologically-plausible form of bounded rationality. Some of the agents in an otherwise efficient hypothetical market are endowed with differing tolerances to the tension caused by being in the minority. This herding tendency may be due to purely psychological effects, momentum-trading strategies, or the rational response to perverse marketplace incentives.The resulting model has the important properties of being both very simple and insensitive to its small number of fundamental parameters. While it is most certainly a caricature market, with only boundedly rational traders and the globally available information stream being modeled directly, other market participants and effects are indirectly replicated. We show that all of the most important "stylized facts" of real market statistics are reproduced by this model.Another useful aspect of the model is that, for certain parameter values, it reduces to a standard efficient-market system. This allows us to isolate and observe the effects of particular kinds of non-rationality. To this end, we consider the effects of different asymmetries in agent behavior and show that one in particular leads to skew statistics consistent with those seen in some real financial markets.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

    Volume (Year): 11 (2008)
    Issue (Month): 07 ()
    Pages: 717-737

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    Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:07:p:717-737
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