Micro-Simulations of Financial Markets and the Stylized Facts
In the last couple of years, microscopic simulations of financial markets have been undertaken by a number of groups from both economics and physics ,,,. While Monte Carlo simulations as a technical tool have been used for a long time in the economics/finance literature, the new generation of models has a particular focus: they try to provide possible explanations of hitherto mysterious statistical findings like the fat tails and clustered volatility of financial returns. While this interpretation of the stylized facts as emergent properties of a complex decentralized multi-component system appears new (and sometimes surprising) for economists, it seems rather natural from the perspective of “scaling theory” in statistical physics. In this paper, we discuss and illustrate this approach focusing on the structure and results of the “prototype” model presented in .
KeywordsFinancial Market Stylize Fact Stochastic Volatility Financial Time Series Efficient Market Hypothesis
Unable to display preview. Download preview PDF.
- 1.Bak, P., Paczuski, M., Shubik, M. (1997) Experts, Noise Traders, and Fat Tail Distributions. Economic Notes 26, 251–290Google Scholar
- 4.Arthur, W.B., Holland, J.H., LeBaron, B., Palmer, R., Tayler, P. (1997) Asset Pricing Under Endogenous Expectations in an Artifical Stock Market. Economic Notes 26, 297–330Google Scholar
- 9.Cohen, K.J., Maier, S.F., Schwartz, R.A., Whitcomb, D.K. (1986) The Microstructure of Security Markets. Prentice-HallGoogle Scholar
- 11.Vries, C.G. de (1994) Stylized Facts of Nominal Exchange Rate Returns. 348389, in: van der Ploeg, F., ed., The Handbook of International Macroeconomics. Blackwell, OxfordGoogle Scholar
- 19.Chen, S.-H., Lux, T., Marchesi, M. (in press) Testing for Nonlinear Structure in an Artificial Financial Market. Journal of Economic Behavior and OrganizationGoogle Scholar
- 20.Chen, S.-H., Yeh, C.H. (2000) On the Emergent Properties of Artificial Stock Markets. National Chengchi University. TaipehGoogle Scholar
- 21.Iori, G. (2000) A Microsimulation of Traders ‘Activity in the Stock Market: The Role of Heterogeneity, Agents’ Interactions and Trade Frictions. University of EssexGoogle Scholar
- 22.Farmer, D., Market Force, Ecology and Evolution, Santa Fe Institute, Working Paper no. 98–12-116Google Scholar