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Heterogeneity and feedback in an agent based market model

Author

Listed:
  • Ghoulmié
  • F.

Abstract

We argue that two main ingredients in agent-based models (and in real speculative markets) which lead to realistic behavior of prices and trading volume are : heterogeneity (given the same source of information, market participants do not behave identically) and feedback (the individual demand of an investor for an asset is not only a function of the current price of the asset as in microeconomic equilibrium theory, but mainly depends on the recent history of the market prices). We then propose an agent-based model described in terms of few parameters which contains these two ingredients and show that the joint effect of feedback and heterogeneity leads to a market price which fluctuates endlessly and a volatility which displays a mean-reverting behavior : the volatility goes neither to zero nor to infinity in the long-run. The behavioral assumption is minimal : agents with threshold response towards information interact indirectly via the price. Heterogeneity is produced endogeneously because of the asynchronous updating process. Our agent-based model generically leads to absence of autocorrelation in returns, excess volatility, volatility clustering and endogeneous bursts of activity non attributable to external noise. Finally, the last part of the paper is a theoretical analysis focusing on the role of heterogeneity and its dynamics in this model

Suggested Citation

  • Ghoulmié & F., 2004. "Heterogeneity and feedback in an agent based market model," Computing in Economics and Finance 2004 205, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:205
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    References listed on IDEAS

    as
    1. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
    2. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
    3. Levy, Haim & Levy, Moshe & Solomon, Sorin, 2000. "Microscopic Simulation of Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780124458901.
    4. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    agent-based model; financial market; stylized facts; heterogeneity; feedback; asynchronous updating.;

    JEL classification:

    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other
    • G19 - Financial Economics - - General Financial Markets - - - Other

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