Bubbles, crashes and intermittency in agent based market models

By Irene Giardina, Jean-Philippe Bouchaud. 2002

145 citations recorded by the source corpus.

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.

Subfields: Condensed Matter Physics, Economics and Econometrics, Statistical and Nonlinear Physics

View Paper: https://www.semanticscholar.org/paper/6923a728f853f7f7bd5fb3b9216ad55fe351a54e

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Citations in the corpus

Power-law behaviour, heterogeneity, and trend chasing (2007, methodology): “This argument is supported by Giardina and Bouchaud (2003) and Lux and Schornstein (2005).”
Leverage causes fat tails and clustered volatility (2009, unknown): “[18] Giardina Irene, and Jean-Phillipe Bouchaud.”
Random walks, liquidity molasses and critical response in financial markets (2004, background): “The last assumption is motivated by theoretical and empirical results (Daniels et al. 2003, Potters and Bouchaud 2003, Smith et al. 2003, Bouchaud et al. 2004), where f(V) is found to be a power-law with a small exponent fðVÞ V (Plerou et al. 2002, Lillo et al. 2003, Farmer and Lillo 2004) or a…”
Crises and Collective Socio-Economic Phenomena: Simple Models and Challenges (2012, unknown): “[144, 145], and for recent reviews, [146–149]).”
Long range dependence in financial markets (2005, unknown): “Although in the agentbased models discussed above, it may not be easy to speak of well-defined “regimes” of activity, but Giardina and Bouchaud [ 25 ] argue that this is indeed the mechanism which generates volatility clustering in the Lux-Marchesi [47] and other models discussed above.”
Heterogeneous Agent Models in Economics and Finance, In: Handbook of Computational Economics II: Agent-Based Computational Economics, edited by Leigh Tesfatsion and Ken Judd, Elsevier, Amsterdam 2006, pp.1109-1186 (2005, methodology): “This new equilibrium price pt is used in the fitness measures (93) and (94) for predictor choice and the new fractions nt and n N t are updated according to (95) and (96).”