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Volatility clustering in agent based market models

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  • Giardina, Irene
  • Bouchaud, Jean-Philippe

Abstract

We define and study a market model, where 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.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:phsmap:v:324:y:2003:i:1:p:6-16
    DOI: 10.1016/S0378-4371(02)01901-5
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    References listed on IDEAS

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    Cited by:

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    3. Ribin Lye & James Peng Lung Tan & Siew Ann Cheong, 2012. "Understanding agent-based models of financial markets: a bottom-up approach based on order parameters and phase diagrams," Papers 1202.0606, arXiv.org.
    4. Lye, Ribin & Tan, James Peng Lung & Cheong, Siew Ann, 2012. "Understanding agent-based models of financial markets: A bottom–up approach based on order parameters and phase diagrams," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(22), pages 5521-5531.
    5. Christopher D. Clack & Elias Court & Dmitrijs Zaparanuks, 2020. "Dynamic Coupling and Market Instability," Papers 2005.13621, arXiv.org.

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