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Price return autocorrelation and predictability in agent-based models of financial markets

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  • Damien Challet
  • Tobias Galla

Abstract

We demonstrate that minority mechanisms arise in the dynamics of markets because of price impact; accordingly the relative importance of minority and delayed majority mechanisms depends on the frequency of trading. We then use mixed Majority/Minority Games to illustrate that a vanishing price return autocorrelation function does not necessarily imply market efficiency. On the contrary, we stress that crucial differences might be present between correlations measured conditionally and unconditionally on external patterns in such models.

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  • Damien Challet & Tobias Galla, 2005. "Price return autocorrelation and predictability in agent-based models of financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 5(6), pages 569-576.
    • Handle: RePEc:taf:quantf:v:5:y:2005:i:6:p:569-576
    DOI: 10.1080/14697680500363963
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    Cited by:

    1. Witte, Björn-Christopher, 2011. "Removing systematic patterns in returns in a financial market model by artificially intelligent traders," BERG Working Paper Series 82, Bamberg University, Bamberg Economic Research Group.
    2. Challet, Damien, 2008. "Inter-pattern speculation: Beyond minority, majority and $-games," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 85-100, January.
    3. Simone Bianco & Roberto Reno, 2009. "Unexpected volatility and intraday serial correlation," Quantitative Finance, Taylor & Francis Journals, vol. 9(4), pages 465-475.
    4. Leonidov, Andrei & Trainin, Vladimir & Zaitsev, Alexander & Zaitsev, Sergey, 2007. "Market mill dependence pattern in the stock market: Modeling of predictability and asymmetry via multi-component conditional distribution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 386(1), pages 240-252.
    5. Simone Bianco & Roberto Ren'o, 2006. "Unexpected volatility and intraday serial correlation," Papers physics/0610023, arXiv.org.

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