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A simple model of price formation

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  • K. Sznajd-Weron
  • R. Weron

Abstract

A simple Ising spin model which can describe the mechanism of price formation in financial markets is proposed. In contrast to other agent-based models, the influence does not flow inward from the surrounding neighbors to the center site, but spreads outward from the center to the neighbors. The model thus describes the spread of opinions among traders. It is shown via standard Monte Carlo simulations that very simple rules lead to dynamics that duplicate those of asset prices.

Suggested Citation

  • K. Sznajd-Weron & R. Weron, 2000. "A simple model of price formation," Papers cond-mat/0101001, arXiv.org, revised Nov 2001.
    • Handle: RePEc:arx:papers:cond-mat/0101001
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    Cited by:

    1. Shang, Lihui & Zhao, Mingming & Ai, Jun & Su, Zhan, 2021. "Opinion evolution in the Sznajd model on interdependent chains," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 565(C).
    2. Tetsuya Takaishi, 2014. "Analysis of Spin Financial Market by GARCH Model," Papers 1409.0118, arXiv.org.
    3. Meudt, Frederik & Schmitt, Thilo A. & Schäfer, Rudi & Guhr, Thomas, 2016. "Equilibrium pricing in an order book environment: Case study for a spin model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 453(C), pages 228-235.
    4. Mehrdad Agha Mohammad Ali Kermani & Reza Ghesmati & Masoud Jalayer, 2018. "Opinion-Aware Influence Maximization: How To Maximize A Favorite Opinion In A Social Network?," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 21(06n07), pages 1-27, September.
    5. Mine Caglar, 2011. "Stock Price Processes with Infinite Source Poisson Agents," Papers 1106.6300, arXiv.org.
    6. Piotr Przybyła & Katarzyna Sznajd-Weron & Rafał Weron, 2014. "Diffusion Of Innovation Within An Agent-Based Model: Spinsons, Independence And Advertising," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 17(01), pages 1-22.
    7. Zubillaga, Bernardo J. & Vilela, André L.M. & Wang, Chao & Nelson, Kenric P. & Stanley, H. Eugene, 2022. "A three-state opinion formation model for financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 588(C).
    8. Kaizoji, Taisei & Bornholdt, Stefan & Fujiwara, Yoshi, 2002. "Dynamics of price and trading volume in a spin model of stock markets with heterogeneous agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 316(1), pages 441-452.
    9. Quanbo Zha & Gang Kou & Hengjie Zhang & Haiming Liang & Xia Chen & Cong-Cong Li & Yucheng Dong, 2020. "Opinion dynamics in finance and business: a literature review and research opportunities," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-22, December.
    10. Tetsuya Takaishi, 2008. "Financial Time Series Analysis of SV Model by Hybrid Monte Carlo," Papers 0807.4394, arXiv.org.
    11. Michele Bee & Juan Pablo Gama, 2022. "A process of demand discovery from a smithian perspective," Textos para Discussão Cedeplar-UFMG 647, Cedeplar, Universidade Federal de Minas Gerais.
    12. Tetsuya Takaishi, 2009. "An Adaptive Markov Chain Monte Carlo Method for GARCH Model," Papers 0901.0992, arXiv.org.
    13. Frederik Meudt & Thilo A. Schmitt & Rudi Schafer & Thomas Guhr, 2015. "Equilibrium Pricing in an Order Book Environment: Case Study for a Spin Model," Papers 1502.01125, arXiv.org.
    14. Kei Katahira & Yu Chen, 2019. "Heterogeneous wealth distribution, round-trip trading and the emergence of volatility clustering in Speculation Game," Papers 1909.03185, arXiv.org.
    15. Kei Katahira & Yu Chen & Gaku Hashimoto & Hiroshi Okuda, 2019. "Development of an agent-based speculation game for higher reproducibility of financial stylized facts," Papers 1902.02040, arXiv.org.
    16. Ko, Bonggyun & Kim, Kyungwon, 2017. "Simulation of sovereign CDS market based on interaction between market participant," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 324-340.
    17. Katahira, Kei & Chen, Yu & Hashimoto, Gaku & Okuda, Hiroshi, 2019. "Development of an agent-based speculation game for higher reproducibility of financial stylized facts," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 524(C), pages 503-518.
    18. Fang, Wen & Wang, Jun, 2013. "Fluctuation behaviors of financial time series by a stochastic Ising system on a Sierpinski carpet lattice," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4055-4063.
    19. Fonseca, Carla L.G. & de Resende, Charlene C. & Fernandes, Danilo H.C. & Cardoso, Rodrigo T.N. & de Magalhães, A.R. Bosco, 2021. "Is the choice of the candlestick dimension relevant in econophysics?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 582(C).
    20. Antonio Aguilera & Edgardo Ugalde, 2007. "A Spatially Extended Model for Residential Segregation," Discrete Dynamics in Nature and Society, Hindawi, vol. 2007, pages 1-20, April.

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