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Market Ecology, Pareto Wealth Distribution and Leptokurtic Returns in Microscopic Simulation of the LLS Stock Market Model

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  • Sorin Solomon
  • Moshe Levy

Abstract

The LLS stock market model is a model of heterogeneous quasi-rational investors operating in a complex environment about which they have incomplete information. We review the main features of this model and several of its extensions. We study the effects of investor heterogeneity and show that predation, competition, or symbiosis may occur between different investor populations. The dynamics of the LLS model lead to the empirically observed Pareto wealth distribution. Many properties observed in actual markets appear as natural consequences of the LLS dynamics: truncated Levy distribution of short-term returns, excess volatility, a return autocorrelation "U-shape" pattern, and a positive correlation between volume and absolute returns.

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  • Sorin Solomon & Moshe Levy, 2000. "Market Ecology, Pareto Wealth Distribution and Leptokurtic Returns in Microscopic Simulation of the LLS Stock Market Model," Papers cond-mat/0005416, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0005416
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-273, April.
    2. Sorin Solomon, 2000. "Generalized Lotka-Volterra (GLV) Models of Stock Markets," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 3(01n04), pages 301-322.
    3. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    4. Levy, Shiki Moshe, 1997. "Are Rich People Smarter?," University of California at Los Angeles, Anderson Graduate School of Management qt9b52n3d6, Anderson Graduate School of Management, UCLA.
    5. Sorin Solomon & Moshe Levy, 1996. "Spontaneous Scaling Emergence In Generic Stochastic Systems," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 7(05), pages 745-751.
    6. Levy, Moshe & Levy, Haim & Solomon, Sorin, 1994. "A microscopic model of the stock market : Cycles, booms, and crashes," Economics Letters, Elsevier, vol. 45(1), pages 103-111, May.
    7. T. Hellthaler, 1995. "The Influence Of Investor Number On A Microscopic Market Model," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 6(06), pages 845-852.
    8. Levy, Moshe & Solomon, Sorin, 1997. "New evidence for the power-law distribution of wealth," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 242(1), pages 90-94.
    9. Sorin Solomon, 1998. "Stochastic Lotka-Volterra Systems of Competing Auto-Catalytic Agents Lead Generically to Truncated Pareto Power Wealth Distribution, Truncated Levy Distribution of Market Returns, Clustered Volatility," Papers cond-mat/9803367, arXiv.org.
    10. Egenter, E. & Lux, T. & Stauffer, D., 1999. "Finite-size effects in Monte Carlo simulations of two stock market models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 268(1), pages 250-256.
    11. Moshe Levy & Sorin Solomon, 1996. "Power Laws Are Logarithmic Boltzmann Laws," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 7(04), pages 595-601.
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    Cited by:

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    2. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "An Empirical Analysis of the Network Structure of the Austrian Interbank Market," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 7, pages 77-87.
    3. C. García & J. García Pérez & J. Dorp, 2011. "Modeling heavy-tailed, skewed and peaked uncertainty phenomena with bounded support," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 20(4), pages 463-486, November.

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