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Evolutionary dynamics in financial markets with many trader types

  • Brock,W.A.
  • Hommes,C.H.

    (University of Wisconsin-Madison, Social Systems Research Institute)

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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File URL: http://www.ssc.wisc.edu/econ/archive/wp2001-07.pdf
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Paper provided by Wisconsin Madison - Social Systems in its series Working papers with number 7.

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Date of creation: 2001
Date of revision:
Handle: RePEc:att:wimass:20017
Contact details of provider: Postal: UNIVERSITY OF WISCONSIN MADISON, SOCIAL SYSTEMS RESEARCH INSTITUTE(S.S.R.I.), MADISON WISCONSIN 53706 U.S.A.

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