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Artificial Markets under a Complexity Perspective

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  • Alejandro Reveiz Herault

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Abstract

The focus of this study is to build, from the `bottom-up´, a market with artificiallyintelligent adaptive agents based on the institutional arrangement of the ColombianForeign Exchange Market (1994-1999) in order to determine simple agents´ design,rules and interactions that are sufficient to create interesting behaviours at themacroscopic level - emerging patterns that replicate the properties of the time seriesfrom the case study.Tools from artificial intelligence research, such as genetic algorithms and fuzzy logic,are the basis of the agents´ mental models, which in turn are used for forecasting,quoting and learning purposes in a double auction market. Sets of fuzzy logic rules yieldadequate, approximately continuous risk and utility preferences without the need to fixtheir mathematical form ex-ante.Statistical properties of financial time series are generated by the artificial market, aswell as some additional non-linearity linked to the existence of a crawling band.Moreover, the behaviour of the simulated exchange rate is consistent with currencyband theory.Agent´s learning favours forecasting rules based on regulatory signals against rulesbased on fundamental information. Also, intra-day volatility is strongly linked to therate of arrival and size of real sector trades. Intra-day volatility is also a function of thefrequency of learning and search specialisation. It is found that when a moderately lowfrequency of learning is used, volatility increases.

Suggested Citation

  • Alejandro Reveiz Herault, 2008. "Artificial Markets under a Complexity Perspective," BORRADORES DE ECONOMIA 004616, BANCO DE LA REPÚBLICA.
  • Handle: RePEc:col:000094:004616
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    References listed on IDEAS

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    1. Steven N. Durlauf, 1997. "What Should Policymakers Know About Economic Complexity?," Working Papers 97-10-080, Santa Fe Institute.
    2. Williams, Arlington W & Smith, Vernon L, 1984. "Cyclical Double-Auction Markets with and without Speculators," The Journal of Business, University of Chicago Press, vol. 57(1), pages 1-33, January.
    3. Holland, John H & Miller, John H, 1991. "Artificial Adaptive Agents in Economic Theory," American Economic Review, American Economic Association, pages 365-371.
    4. Miller, Ross M., 1996. "Smart market mechanisms: From practice to theory," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 967-978.
    5. Brooks, Chris & Reveiz, Alejandro H., 2002. "A model for exchange rates with crawling bands--an application to the Colombian peso," Journal of Economics and Business, Elsevier, pages 483-503.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    adaptive agents; artificial markets; constrained generating procedures; fuzzy logic and genetic algorithms.;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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