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Reverse Engineering Financial Markets with Majority and MinorityGames using Genetic Algorithms

Author

Listed:
  • Judith WIESINGER

    (ETH Zurich)

  • Didier SORNETTE

    (ETH Zurich and Swiss Finance Institute)

  • Jeffrey SATINOVER

    (ETH Zurich)

Abstract

Using virtual stock markets with artificial interacting software in- vestors, aka agent-based models (ABMs), we present a method to reverse engineer real-world financial time series. We model financial markets as made of a large number of interacting boundedly rational agents. By op- timizing the similarity between the actual data and that generated by the reconstructed virtual stock market, we obtain parameters and strategies, which reveal some of the inner workings of the target stock market. We validate our approach by out-of-sample predictions of directional moves of the Nasdaq Composite Index.

Suggested Citation

  • Judith WIESINGER & Didier SORNETTE & Jeffrey SATINOVER, 2010. "Reverse Engineering Financial Markets with Majority and MinorityGames using Genetic Algorithms," Swiss Finance Institute Research Paper Series 10-08, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1008
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    Citations

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    Cited by:

    1. Yang, G. & Chen, Y. & Huang, J.P., 2016. "The highly intelligent virtual agents for modeling financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 443(C), pages 98-108.
    2. Krause, Sebastian M. & Bornholdt, Stefan, 2013. "Spin models as microfoundation of macroscopic market models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4048-4054.

    More about this item

    Keywords

    reverse-engineering; financial markets; agent-based models; genetic algorithms; forecast; trading strategies; market regimes;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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