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Financial Markets as Nonlinear Adaptive Evolutionary Systems

  • Hommes, C.H.


    (Universiteit van Amsterdam)

This paper gives an overview of joint work with Buz Brock, on evolutionary adaptive belief systems (ABS) for modelling financial markets. Recent work with Andrea Gaunersdorfer is also reviewed and some recent experimental work on expectation formation in financial markets is also discussed. Financial markets are viewed as evolutionary systems between different, competing trading strategies. Agents are boundedly rational in the sense that they tend to follow strategies that have performed well, according to realized profits or accumulated wealth, in the recent past. Simple technical trading rules may survive evolutionary competition in a heterogeneous world where prices and beliefs co-evolve over time. The evolutionary model explains stylized facts of real markets, such as fat tails and volatility clustering. Although the ABS is very simple, it is able to match the autocorrelation patterns of returns, squared returns and absolute returns of 40 years of S&P 500 data.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 00-03.

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Date of creation: 2000
Date of revision:
Handle: RePEc:ams:ndfwpp:00-03
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
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  1. Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Society for Computational Economics, vol. 19(1), pages 95-132, February.
  2. Hommes, C.H. & Sonnemans, J. & Tuinstra, J. & van de Velden, H., 1999. "Expectation Driven Price Volatility in an Experimental Cobweb Economy," CeNDEF Working Papers 99-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
  4. Sonnemans, Joep & Hommes, Cars & Tuinstra, Jan & van de Velden, Henk, 2004. "The instability of a heterogeneous cobweb economy: a strategy experiment on expectation formation," Journal of Economic Behavior & Organization, Elsevier, vol. 54(4), pages 453-481, August.
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  17. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695.
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