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Agent-Based Models of Financial Markets: A Comparison with Experimental Markets

47 Pages Posted: 19 Nov 2001  

Tomaso Poggio

Massachusetts Institute of Technology (MIT) - Brain and Cognitive Sciences

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Blake LeBaron

Brandeis University - International Business School

Nicholas T. Chan

AlphaSimplex Group, LLC

Date Written: October 2001

Abstract

We construct a computer simulation of a repeated double-auction market, designed to match those in experimental-market settings with human subjects, to model complex interactions among artificially-intelligent traders endowed with varying degrees of learning capabilities. In the course of six different experimental designs, we investigate a number of features of our agent-based model: the price efficiency of the market, the speed at which prices converge to the rational expectations equilibrium price, the dynamics of the distribution of wealth among the different types of AI-agents, trading volume, bid/ask spreads, and other aspects of market dynamics. We are able to replicate several endings of human-based experimental markets, however, we also and intriguing differences between agent-based and human-based experiments.

Keywords: Agent-Based Models, Artificial Markets, Experimental Markets, Market Microstructure

Suggested Citation

Poggio, Tomaso and Lo, Andrew W. and LeBaron, Blake and Chan, Nicholas T., Agent-Based Models of Financial Markets: A Comparison with Experimental Markets (October 2001). MIT Sloan Working Paper No. 4195-01. Available at SSRN: https://ssrn.com/abstract=290140 or http://dx.doi.org/10.2139/ssrn.290140

Tomaso Poggio (Contact Author)

Massachusetts Institute of Technology (MIT) - Brain and Cognitive Sciences ( email )

Artificial Intelligence Labratory
Cambridge, MA 02139
United States
(617) 253-5230 (Phone)

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Stata Center
Cambridge, MA 02142
United States

Blake D. LeBaron

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-2258 (Phone)
781-736-2269 (Fax)

Nicholas Tung Chan

AlphaSimplex Group, LLC ( email )

One Cambridge Center
Cambridge, MA 02142
United States

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