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Price return auto-correlation and predictability in agent-based models of financial markets

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  • Damien Challet
  • Tobias Galla

Abstract

We demonstrate that minority mechanisms arise in the dynamics of markets because of effects of price impact; accordingly the relative importance of minority and delayed majority mechanisms depends on the frequency of trading. We then use minority games to illustrate that a vanishing price return auto-correlation function does not necessarily imply market efficiency. On the contrary, we stress the difference between correlations measured conditionally and unconditionally on external patterns.

Suggested Citation

  • Damien Challet & Tobias Galla, 2004. "Price return auto-correlation and predictability in agent-based models of financial markets," Papers cond-mat/0404264, arXiv.org, revised Dec 2004.
    • Handle: RePEc:arx:papers:cond-mat/0404264
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    Cited by:

    1. Leonidov, Andrei & Trainin, Vladimir & Zaitsev, Alexander & Zaitsev, Sergey, 2007. "Market mill dependence pattern in the stock market: Modeling of predictability and asymmetry via multi-component conditional distribution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 386(1), pages 240-252.
    2. Kimihiko Sasaki & Daisuke Yokouchi, 2025. "An artificial market model for the forex market," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-16, December.
    3. Witte, Björn-Christopher, 2011. "Removing systematic patterns in returns in a financial market model by artificially intelligent traders," BERG Working Paper Series 82, Bamberg University, Bamberg Economic Research Group.
    4. Challet, Damien, 2008. "Inter-pattern speculation: Beyond minority, majority and $-games," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 85-100, January.
    5. Simone Bianco & Roberto Reno, 2009. "Unexpected volatility and intraday serial correlation," Quantitative Finance, Taylor & Francis Journals, vol. 9(4), pages 465-475.
    6. Szymon Chudziak, 2025. "Studying economic complexity with agent-based models: advances, challenges and future perspectives," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 20(2), pages 413-449, April.
    7. Simone Bianco & Roberto Ren'o, 2006. "Unexpected volatility and intraday serial correlation," Papers physics/0610023, arXiv.org.

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