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Model of cunning agents

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  • Denys, Mateusz

Abstract

A numerical agent-based spin model of financial markets, based on the Potts model from statistical mechanics, with a novel interpretation of the spin variable (as regards financial-market models) is presented. In this model, a value of the spin variable is only the agent’s opinion concerning current market situation, which he communicates to his nearest neighbors. Instead, the agent’s action (i.e., buying, selling, or staying inactive) is connected with a change of the spin variable. Hence, the agents can be considered as cunning in this model. That is, these agents encourage their neighbors to buy stocks if the agents have an opportunity to sell them, and the agents encourage their neighbors to sell stocks if the agents have a reversed opportunity. Predictions of the model are in good agreement with empirical data from various real-life financial markets. The model reproduces the shape of the usual and absolute-value autocorrelation function of returns as well as the distribution of times between superthreshold losses.

Suggested Citation

  • Denys, Mateusz, 2021. "Model of cunning agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 574(C).
    • Handle: RePEc:eee:phsmap:v:574:y:2021:i:c:s0378437121002594
    DOI: 10.1016/j.physa.2021.125987
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    References listed on IDEAS

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    1. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
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