Stylized Facts of Financial Markets and Market Crashes in Minority Games

6 Pages Posted: 2 Feb 2001

See all articles by Damien Challet

Damien Challet

CentraleSupélec; Encelade Capital SA

Matteo Marsili

Abdus Salam International Centre Theoretical Physics (ICTP)

Yi-Cheng Zhang

Universite de Fribourg

Date Written: January 22, 2001

Abstract

We present and study a Minority Game based model of a financial market where adaptive agents - the speculators - interact with deterministic agents - called producers. Speculators trade only if they detect predictable patterns which grant them a positive gain. Indeed the average number of active speculators grows with the amount of information that producers inject into the market. Transitions between equilibrium and out of equilibrium behavior are observed when the relative number of speculators to the complexity of information or to the number of producers are changed. When the system is out of equilibrium, stylized facts arise, such as fat tailed distribution of returns and volatility clustering. Without speculators, the price follows a random walk; this implies that stylized facts arise because of the presence of speculators. Furthermore, if speculators abandon price taking behavior, stylized facts disappear.

Keywords: Bounded rationality, heterogeneous agents, inductive behavior, minority game, stylized facts, minimal model

Suggested Citation

Challet, Damien and Marsili, Matteo and Zhang, Yi-Cheng, Stylized Facts of Financial Markets and Market Crashes in Minority Games (January 22, 2001). Available at SSRN: https://ssrn.com/abstract=258559 or http://dx.doi.org/10.2139/ssrn.258559

Damien Challet (Contact Author)

CentraleSupélec ( email )

Labo MICS
3, rue Joliot-Curie
Gif-sur-Yvette, 91192
France

Encelade Capital SA ( email )

Chemin du Bochet 8
Sulpice, 1025
Switzerland

Matteo Marsili

Abdus Salam International Centre Theoretical Physics (ICTP)

Strada Costiera 11
34100 Trieste
Italy

Yi-Cheng Zhang

Universite de Fribourg

Institut de Physique Theorique
Fribourg, FR 1700
Switzerland

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