Do ‘Complex’ Financial Models Really Lead to Complex Dynamics? Agent-Based Models and Multifractality

32 Pages Posted: 30 Jul 2019 Last revised: 3 Mar 2020

See all articles by Jiri Kukacka

Jiri Kukacka

Charles University - Institute of Economic Studies; The Czech Academy of Sciences - Institute of Information Theory and Automation

Ladislav Kristoufek

Institute of Information Theory and Automation, Prague; Charles University in Prague

Date Written: December 15, 2019

Abstract

Agent-based models are usually claimed to generate complex dynamics; however, the link to such complexity has not been subject to rigorous examination. This paper studies this link between the complexity of financial time series---measured by their multifractal properties---and the design of various small-scale agent-based frameworks used to model the heterogeneity of financial markets. Nine popular models are analyzed, and while some of the models do not generate interesting multifractal patterns, we observe the strongest tendency towards multifractal behavior for the Bornholdt Ising model, the discrete choice-based models by Gaunersdorfer & Hommes and Schmitt & Westerhoff, and the transition probabilities-based framework by Franke & Westerhoff. Complexity is thus not an automatic feature of the time series generated by any agent-based model but generated only by models with specific properties. In addition, because multifractality is considered a financial stylized fact, its presence can be used as a new means to validate such models.

Keywords: complex systems, financial agent-based models, time series analysis, multifractal analysis, detrended fluctuation analysis

JEL Classification: C13, C22, C63, D84, G02, G17

Suggested Citation

Kukacka, Jiri and Kristoufek, Ladislav, Do ‘Complex’ Financial Models Really Lead to Complex Dynamics? Agent-Based Models and Multifractality (December 15, 2019). This is a pre-print of an article published in the Journal of Economic Dynamics and Control (2020), 113C. The final authenticated version is available online at DOI: 10.1016/j.jedc.2020.103855, Available at SSRN: https://ssrn.com/abstract=3426341 or http://dx.doi.org/10.2139/ssrn.3426341

Jiri Kukacka (Contact Author)

Charles University - Institute of Economic Studies ( email )

Opletalova 26
Prague 1, CZ-11000
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/kukacka

The Czech Academy of Sciences - Institute of Information Theory and Automation ( email )

Pod Vodarenskou vezi 4
Prague 8, CZ-18208
Czech Republic

HOME PAGE: http://www.utia.cas.cz/cs/people/kuka-ka

Ladislav Kristoufek

Institute of Information Theory and Automation, Prague ( email )

Pod vodarenskou vezi 4
Praha, CZ-18208
Czech Republic

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

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