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Evolutionary Dynamics in Financial Markets With Many Trader Types

  • Brock, W.A.
  • Hommes, C.H.


    (Universiteit van Amsterdam)

  • Wagener, F.O.O.


    (Universiteit van Amsterdam)

This paper develops the notion of a Large Type Limit (LTL) describing the average behavior of adaptive evolutionary systems with many trader types. It is shown that generic and persistent features of adaptive evolutionary systems with many trader types are well described by the large type limit. Stability and bifurcation routes to instability and strange attractors are studied. An increase in the ``intensity of adaption'' or in the diversity of beliefs may lead to deviations from the RE fundamental benchmark and excess volatility. Simple examples of LTL are able to generate important stylized facts, such as volatility clustering and long memory, observed in real financial 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 01-01.

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Date of creation: 2001
Date of revision:
Handle: RePEc:ams:ndfwpp:01-01
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  6. Cars H. Hommes, 2001. "Financial Markets as Nonlinear Adaptive Evolutionary Systems," Tinbergen Institute Discussion Papers 01-014/1, Tinbergen Institute.
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  12. KIRMAN, Alan & TEYSSIÈRE, Gilles, . "Microeconomic models for long memory in the volatility of financial time series," CORE Discussion Papers RP 1593, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  18. Gaunersdorfer, A. & Hommes, C.H., 2000. "A Nonlinear Structural Model for Volatility Clustering," CeNDEF Working Papers 00-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  31. repec:cup:macdyn:v:4:y:2000:i:2:p:139-69 is not listed on IDEAS
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  36. Carl Chiarella & Xue-Zhong He, 2000. "Stability of Competitive Equilibria with Heterogeneous Beliefs and Learning," Research Paper Series 37, Quantitative Finance Research Centre, University of Technology, Sydney.
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