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Modelling Financial Markets by Self-Organized Criticality

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  • A. E. Biondo
  • A. Pluchino
  • A. Rapisarda

Abstract

We present a financial market model, characterized by self-organized criticality, that is able to generate endogenously a realistic price dynamics and to reproduce well-known stylized facts. We consider a community of heterogeneous traders, composed by chartists and fundamentalists, and focus on the role of informative pressure on market participants, showing how the spreading of information, based on a realistic imitative behavior, drives contagion and causes market fragility. In this model imitation is not intended as a change in the agent's group of origin, but is referred only to the price formation process. We introduce in the community also a variable number of random traders in order to study their possible beneficial role in stabilizing the market, as found in other studies. Finally we also suggest some counterintuitive policy strategies able to dampen fluctuations by means of a partial reduction of information.

Suggested Citation

  • A. E. Biondo & A. Pluchino & A. Rapisarda, 2015. "Modelling Financial Markets by Self-Organized Criticality," Papers 1507.04298, arXiv.org, revised Oct 2015.
  • Handle: RePEc:arx:papers:1507.04298
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    File URL: http://arxiv.org/pdf/1507.04298
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    References listed on IDEAS

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    1. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
    2. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters,in: THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78 World Scientific Publishing Co. Pte. Ltd..
    3. George A. Akerlof & Robert J. Shiller, 2010. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism," Economics Books, Princeton University Press, edition 1, number 9163.
    4. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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    Citations

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    Cited by:

    1. Alessandro Pluchino & Alessio. E. Biondo & Andrea Rapisarda, 2018. "Exploring the role of talent and luck in getting success," Papers 1811.05206, arXiv.org.
    2. repec:eee:phsmap:v:503:y:2018:i:c:p:714-726 is not listed on IDEAS
    3. repec:wsi:acsxxx:v:21:y:2018:i:03n04:n:s0219525918500145 is not listed on IDEAS
    4. Zeng, Yayun & Wang, Jun & Xu, Kaixuan, 2017. "Complexity and multifractal behaviors of multiscale-continuum percolation financial system for Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 364-376.
    5. repec:wsi:acsxxx:v:20:y:2017:i:02n03:n:s0219525917500059 is not listed on IDEAS
    6. L. S. Di Mauro & A. Pluchino & A. E. Biondo, 2018. "A Game of Tax Evasion: evidences from an agent-based model," Papers 1809.08146, arXiv.org.

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