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A Calibration Procedure for Analyzing Stock Price Dynamics in an Agent-Based Framework

41 Pages Posted: 28 Sep 2013 Last revised: 7 Jul 2014

Maria Cristina Recchioni

Università Politecnica delle Marche - Department of Management

Gabriele Tedeschi

Università Politecnica delle Marche - Faculty of Economics; Jaume I University - Department of Economics

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Date Written: July 3, 2014

Abstract

In this paper we introduce a calibration procedure suitable for the validation of agent based models. Starting from the well-known financial model of Brock and Hommes 1998, we show how an appropriate calibration technique makes the model able to describe price time series. In particular, we formulate the calibration problem as a nonlinear constrained optimization that can be solved numerically via a gradient-based method. The calibration results show that the simplest version of the Brock and Hommes model, with two trader types, fundamentalists and trend-followers, well replicates the price series of four different markets indices: the S&P 500, the Euro Stoxx 50, the Nikkei 225 and the CSI 300. Moreover, we show how the parameter values of the calibrated model are important to interpret the trader behavior on the different investigated markets. These parameters are then used for price forecasting. To further improve the forecasting, we modify our calibration approach by increasing the trader information set and we show how this new method improves the model’s ability in the prediction of market prices.

Keywords: Calibration, Validation, Forecasting, Agent-based models, Asset pricing, Heterogeneous beliefs

JEL Classification: C53, C63, G17

Suggested Citation

Recchioni, Maria Cristina and Tedeschi, Gabriele and Gallegati, Mauro, A Calibration Procedure for Analyzing Stock Price Dynamics in an Agent-Based Framework (July 3, 2014). Available at SSRN: https://ssrn.com/abstract=2330739 or http://dx.doi.org/10.2139/ssrn.2330739

Maria Cristina Recchioni (Contact Author)

Università Politecnica delle Marche - Department of Management ( email )

P.zza Roma 22
Ancona, 60121
Italy

Gabriele Tedeschi

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Jaume I University - Department of Economics ( email )

Campus del Riu Sec.
E-12071 Castellon
Spain

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

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