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Market Statistics Of A Psychology-Based Heterogeneous Agent Model

Author

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  • HARBIR LAMBA

    (Department of Mathematical Sciences, George Mason University, MS 3F2, 4400 University Drive, Fairfax, VA 22030, USA)

  • TIM SEAMAN

    (Natural Science and Mathematics Division, NVCC, 15200 Neabsco Mills Road, Woodbridge, VA 22191, USA)

Abstract

We continue an investigation into a class of agent-based market models that are motivated by a psychologically-plausible form of bounded rationality. Some of the agents in an otherwise efficient hypothetical market are endowed with differing tolerances to the tension caused by being in the minority. This herding tendency may be due to purely psychological effects, momentum-trading strategies, or the rational response to perverse marketplace incentives.The resulting model has the important properties of being both very simple and insensitive to its small number of fundamental parameters. While it is most certainly a caricature market, with only boundedly rational traders and the globally available information stream being modeled directly, other market participants and effects are indirectly replicated. We show that all of the most important "stylized facts" of real market statistics are reproduced by this model.Another useful aspect of the model is that, for certain parameter values, it reduces to a standard efficient-market system. This allows us to isolate and observe the effects of particular kinds of non-rationality. To this end, we consider the effects of different asymmetries in agent behavior and show that one in particular leads to skew statistics consistent with those seen in some real financial markets.

Suggested Citation

  • Harbir Lamba & Tim Seaman, 2008. "Market Statistics Of A Psychology-Based Heterogeneous Agent Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(07), pages 717-737.
    • Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:07:n:s0219024908005019
    DOI: 10.1142/S0219024908005019
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    References listed on IDEAS

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    1. Alain Arneodo & Jean-Philippe Bouchaud & Rama Cont & Jean-Francois Muzy & Marc Potters & Didier Sornette, 1996. "Comment on "Turbulent cascades in foreign exchange markets"," Science & Finance (CFM) working paper archive 9607120, Science & Finance, Capital Fund Management.
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    3. Kyaw, NyoNyo A. & Los, Cornelis A. & Zong, Sijing, 2006. "Persistence characteristics of Latin American financial markets," Journal of Multinational Financial Management, Elsevier, vol. 16(3), pages 269-290, July.
    4. Mogens H. Jensen & Anders Johansen & Ingve Simonsen, 2002. "Inverse Statistics in Economics : The gain-loss asymmetry," Papers cond-mat/0211039, arXiv.org.
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    Cited by:

    1. Torsten Trimborn & Martin Frank & Stephan Martin, 2017. "Mean Field Limit of a Behavioral Financial Market Model," Papers 1711.02573, arXiv.org.
    2. Trimborn, Torsten & Frank, Martin & Martin, Stephan, 2018. "Mean field limit of a behavioral financial market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 613-631.

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