Price Variations in a Stock Market with Many Agents
Large variations in stock prices happen with sufficient frequency to raise doubts about existing models, which all fail to account for non-Gaussian statistics. We construct simple models of a stock market, and argue that the large variations may be due to a crowd effect, where agents imitate each other's behavior. The variations over different time scales can be related to each other in a systematic way, similar to the Levy stable distribution proposed by Mandelbrot to describe real market indices. In the simplest, least realistic case, exact results for the statistics of the variations are derived by mapping onto a model of diffusing and annihilating particles, which has been solved by quantum field theory methods. When the agents imitate each other and respond to recent market volatility, different scaling behavior is obtained. In this case the statistics of price variations is consistent with empirical observations. The interplay between "rational" traders whose behavior is derived from fundamental analysis of the stock, including dividends, and "noise traders", whose behavior is governed solely by studying the market dynamics, is investigated. When the relative number of rational traders is small, "bubbles" often occur, where the market price moves outside the range justified by fundamental market analysis. When the number of rational traders is larger, the market price is generally locked within the price range they define.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Sep 1996|
|Contact details of provider:|| Postal: 1399 Hyde Park Road, Santa Fe, New Mexico 87501|
Web page: http://www.santafe.edu/sfi/publications/working-papers.html
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gale, Douglas & Rosenthal, Robert W., 1999.
"Experimentation, Imitation, and Stochastic Stability,"
Journal of Economic Theory,
Elsevier, vol. 84(1), pages 1-40, January.
- Gale, D. & Rosental, R.W., 1996. "Experimentation, Imitation, and Stochastic Stability," Papers 65, Boston University - Industry Studies Programme.
- Douglas Gale & Robert W. Rosenthal, 1996. "Experimentation, Imitation, and Stochastic Stability," Papers 0065, Boston University - Industry Studies Programme.
- Alain Arneodo & Jean-Philippe Bouchaud & Rama Cont & Jean-Francois Muzy & Marc Potters & Didier Sornette, 1996. "Comment on "Turbulent cascades in foreign exchange markets"," Science & Finance (CFM) working paper archive 9607120, Science & Finance, Capital Fund Management.
- Grandmont, Jean-Michel, 1993.
"Behavioural heterogeneity and Cournot oligopoly equilibrium,"
Elsevier, vol. 47(2), pages 167-187, June.
- Grandmont, Jean-Michel, 1993. "Behavioral heterogeneity and Cournot oligopoly equilibrium," CEPREMAP Working Papers (Couverture Orange) 9305, CEPREMAP.
- Jean-Michel Grandmont, 1993. "Behavioral Heterogeneity and Cournot Oligopoly Equilibrium," Cowles Foundation Discussion Papers 1044, Cowles Foundation for Research in Economics, Yale University.
When requesting a correction, please mention this item's handle: RePEc:wop:safiwp:96-09-075. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel)
If references are entirely missing, you can add them using this form.