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Heterogeneity, spontaneous coordination and extreme events within large-scale and small-scale agent-based financial market models

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  • Schmitt, Noemi
  • Westerhoff, Frank

Abstract

We propose a novel agent-based financial market framework in which speculators usually follow their own individual technical and fundamental trading rules to determine their orders. However, there are also sunspot-initiated periods in which their trading behavior is correlated. We are able to convert our (very) simple large-scale agent-based model into a simple small-scale agent-based model and show that our framework is able to produce bubbles and crashes, excess volatility, fattailed return distributions, serially uncorrelated returns and volatility clustering. While lasting volatility outbursts occur if the mass of speculators switches to technical analysis, extreme price changes emerge if sunspots coordinate temporarily the behavior of speculators.

Suggested Citation

  • Schmitt, Noemi & Westerhoff, Frank, 2016. "Heterogeneity, spontaneous coordination and extreme events within large-scale and small-scale agent-based financial market models," BERG Working Paper Series 111, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:111
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    More about this item

    Keywords

    financial markets; stylized facts; agent-based models; technical and fundamental analysis; heterogeneity and coordination; sunspots and extreme events;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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