IDEAS home Printed from https://ideas.repec.org/p/hal/cesptp/halshs-00983008.html
   My bibliography  Save this paper

Financial Symmetry and Moods in the Market

Author

Listed:
  • Roberto Savona

    (Department of Economics and Management - UniBs - Università degli Studi di Brescia = University of Brescia)

  • Maxence Soumare

    (LJAD - Laboratoire Jean Alexandre Dieudonné - UNS - Université Nice Sophia Antipolis (1965 - 2019) - CNRS - Centre National de la Recherche Scientifique - UniCA - Université Côte d'Azur)

  • Jørgen Vitting Andersen

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper introduces a theoretical framework for collective decision making to describe fluctuations and transitions in financial markets. Investors are assumed to be boundedly rational, using a limited set of information including past price history and expectation on future dividends. Investment strategies are dynamically changed based on realized returns within a game theoretical scheme with Nash equilibria. In such a setting, markets behave as complex systems whose payoff reflect an intrinsic financial symmetry that guarantees equilibrium in price dynamics (fundamentalist state) until the symmetry is broken leading to bubble or anti-bubble scenarios (speculative state). We model such two-phase transition in a micro-to-macro scheme through a Ginzburg-Landau-based power expansion leading to a market temperature parameter which modulates the state transitions in the market. Via simulation we prove that complex market dynamics can be phenomenologically explained by the number of traders, the strategies used by agents and the past price history, all included in our market temperature parameter.

Suggested Citation

  • Roberto Savona & Maxence Soumare & Jørgen Vitting Andersen, 2014. "Financial Symmetry and Moods in the Market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00983008, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00983008
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00983008
    as

    Download full text from publisher

    File URL: https://shs.hal.science/halshs-00983008/document
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    2. Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Springer;Society for Computational Economics, vol. 19(1), pages 95-132, February.
    3. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
    4. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & van de Velden, Henk, 2008. "Expectations and bubbles in asset pricing experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 116-133, July.
    5. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70(2), pages 111-111.
    6. W. Brian Arthur & Paul Tayler, "undated". "Asset Pricing Under Endogenous Expectations in an Artificial Stock Market," Computing in Economics and Finance 1997 57, Society for Computational Economics.
    7. J. Doyne Farmer, 2002. "Market force, ecology and evolution," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 11(5), pages 895-953, November.
    8. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
    9. Challet, D. & Zhang, Y.-C., 1997. "Emergence of cooperation and organization in an evolutionary game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 246(3), pages 407-418.
    10. John Foster, 2005. "From simplistic to complex systems in economics," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 29(6), pages 873-892, November.
    11. Magda Roszczynska-Kurasinska & Andrzej Nowak & Daniel Kamieniarz & Sorin Solomon & Jørgen Vitting Andersen, 2012. "Short and Long Term Investor Synchronization Caused by Decoupling," PLOS ONE, Public Library of Science, vol. 7(12), pages 1-8, December.
    12. Charles R. Plott & Vernon L. Smith, 1978. "An Experimental Examination of Two Exchange Institutions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(1), pages 133-153.
    13. Johnson, Neil F & Hart, Michael & Hui, P.M, 1999. "Crowd effects and volatility in markets with competing agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 1-8.
    14. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    15. Magda Roszczynska-Kurasinska & Andrzej Nowak & Daniel Kamieniarz & Sorin Solomon & Jørgen Vitting Andersen, 2012. "Short and Long Term Investor Synchronization Caused by Decoupling," Post-Print hal-00853991, HAL.
    16. Vernon L. Smith, 1965. "Experimental Auction Markets and the Walrasian Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 73(4), pages 387-387.
    17. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
    18. William A. Brock & Cars H. Hommes, 2001. "A Rational Route to Randomness," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 16, pages 402-438, Edward Elgar Publishing.
    19. Coppinger, Vicki M & Smith, Vernon L & Titus, Jon A, 1980. "Incentives and Behavior in English, Dutch and Sealed-Bid Auctions," Economic Inquiry, Western Economic Association International, vol. 18(1), pages 1-22, January.
    20. Chordia, Tarun & Subrahmanyam, Avanidhar, 2004. "Order imbalance and individual stock returns: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 72(3), pages 485-518, June.
    21. Challet, Damien & Zhang, Yi-Cheng, 1998. "On the minority game: Analytical and numerical studies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 256(3), pages 514-532.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yi-Fang Liu & Jørgen Vitting Andersen & Philippe de Peretti, 2016. "Onset of financial instability studied via agent-based models," Post-Print hal-01397400, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Roberto Savona & Maxence Soumare & Jørgen Vitting Andersen, 2015. "Financial Symmetry and Moods in the Market," PLOS ONE, Public Library of Science, vol. 10(4), pages 1-21, April.
    2. Cars Hommes & Florian Wagener, 2008. "Complex Evolutionary Systems in Behavioral Finance," Tinbergen Institute Discussion Papers 08-054/1, Tinbergen Institute.
    3. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    4. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
    5. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186, Elsevier.
    6. Hommes, C.H., 2005. "Heterogeneous Agents Models: two simple examples, forthcoming In: Lines, M. (ed.) Nonlinear Dynamical Systems in Economics, CISM Courses and Lectures, Springer, 2005, pp.131-164," CeNDEF Working Papers 05-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    7. Jorgen Vitting Andersen & Andrzej Nowak, 2020. "Symmetry and financial Markets," Documents de travail du Centre d'Economie de la Sorbonne 20030, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    8. Liu, Yi-Fang & Andersen, Jørgen Vitting & Frolov, Maxime & de Peretti, Philippe, 2021. "Synchronization in human decision-making," Chaos, Solitons & Fractals, Elsevier, vol. 143(C).
    9. Gaunersdorfer, A. & Hommes, C.H. & Wagener, F.O.O., 2000. "Bifurcation Routes to Volatility Clustering," CeNDEF Working Papers 00-04, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    10. Amilon, Henrik, 2008. "Estimation of an adaptive stock market model with heterogeneous agents," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 342-362, March.
    11. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
    12. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2001. "Evolutionary Dynamics in Financial Markets With Many Trader Types," CeNDEF Working Papers 01-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    13. Cars Hommes, 2010. "The heterogeneous expectations hypothesis: some evidence from the lab," Post-Print hal-00753041, HAL.
    14. Lux, Thomas, 2008. "Stochastic behavioral asset pricing models and the stylized facts," Economics Working Papers 2008-08, Christian-Albrechts-University of Kiel, Department of Economics.
    15. Gaunersdorfer, Andrea & Hommes, Cars H. & Wagener, Florian O.O., 2008. "Bifurcation routes to volatility clustering under evolutionary learning," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 27-47, July.
    16. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2009. "More hedging instruments may destabilize markets," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1912-1928, November.
    17. Detlef Seese & Christof Weinhardt & Frank Schlottmann (ed.), 2008. "Handbook on Information Technology in Finance," International Handbooks on Information Systems, Springer, number 978-3-540-49487-4, November.
    18. Hommes, Cars, 2018. "Behavioral & experimental macroeconomics and policy analysis: a complex systems approach," Working Paper Series 2201, European Central Bank.
    19. Hommes, C.H., 2001. "Modeling the stylized facts in finance through simple nonlinear adaptive systems," CeNDEF Working Papers 01-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    20. Frijns, Bart & Lehnert, Thorsten & Zwinkels, Remco C.J., 2010. "Behavioral heterogeneity in the option market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2273-2287, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:halshs-00983008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.