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Bubbles, crashes and intermittency in agent based market models

Author

Listed:
  • Irene Giardina
  • Jean-Philippe Bouchaud

    (Science & Finance, Capital Fund Management
    CEA Saclay;)

Abstract

We define and study a rather complex market model, inspired from the Santa Fe artificial market and the Minority Game. Agents have different strategies among which they can choose, according to their relative profitability, with the possibility of not participating to the market. The price is updated according to the excess demand, and the wealth of the agents is properly accounted for. Only two parameters play a significant role: one describes the impact of trading on the price, and the other describes the propensity of agents to be trend following or contrarian. We observe three different regimes, depending on the value of these two parameters: an oscillating phase with bubbles and crashes, an intermittent phase and a stable `rational' market phase. The statistics of price changes in the intermittent phase resembles that of real price changes, with small linear correlations, fat tails and long range volatility clustering. We discuss how the time dependence of these two parameters spontaneously drives the system in the intermittent region. We analyze quantitatively the temporal correlation of activity in the intermittent phase, and show that the `random time strategy shift' mechanism that we proposed earlier allows one to understand the observed long ranged correlations. Other mechanisms leading to long ranged correlations are also reviewed. We discuss several other issues, such as the formation of bubbles and crashes, the influence of transaction costs and the distribution of agents wealth.

Suggested Citation

  • Irene Giardina & Jean-Philippe Bouchaud, 2002. "Bubbles, crashes and intermittency in agent based market models," Science & Finance (CFM) working paper archive 500022, Science & Finance, Capital Fund Management.
    • Handle: RePEc:sfi:sfiwpa:500022
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    References listed on IDEAS

    as
    1. Levy, Haim & Levy, Moshe & Solomon, Sorin, 2000. "Microscopic Simulation of Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780124458901.
    2. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
    3. Mantegna,Rosario N. & Stanley,H. Eugene, 2007. "Introduction to Econophysics," Cambridge Books, Cambridge University Press, number 9780521039871.
    4. Vasiliki Plerou & Parameswaran Gopikrishnan & Xavier Gabaix & H. Eugene Stanley, 2001. "Quantifying Stock Price Response to Demand Fluctuations," Papers cond-mat/0106657, arXiv.org.
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    Cited by:

    1. D. Heymann & R. P. J. Perazzo & A. R. Schuschny, 2004. "Learning And Imitation: Transitional Dynamics In Variants Of The Bam," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 21-38.
    2. Leopoldo S'anchez-Cant'u & Carlos Arturo Soto-Campos & Andriy Kryvko, 2016. "Evidence of Self-Organization in Time Series of Capital Markets," Papers 1604.03996, arXiv.org, revised Mar 2017.
    3. Samuel E. Vazquez, 2009. "Scale Invariance, Bounded Rationality and Non-Equilibrium Economics," Papers 0902.3840, arXiv.org.
    4. Giardina, Irene & Bouchaud, Jean-Philippe, 2003. "Volatility clustering in agent based market models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 6-16.

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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