Planar Learning to Forecast Market Games

38 Pages Posted: 12 Jul 2021

See all articles by Eva Levelt

Eva Levelt

University of Amsterdam, Faculty of Economics and Business (FEB), Students; University of Amsterdam

Cars H. Hommes

Government of Canada - Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute

Myrna Hennequin

University of Sussex

Date Written: June 30, 2021

Abstract

In a system where expectations and realisations of a price feed back to each other, it has been found that the sign and strength of this feedback is an important predictor of the market stability. In this paper we contribute to the generalisation of this result to a two dimensional system, where the expectations and realisations of two prices affect each other. We conduct a Learning to Forecast Experiment and show that eigenvalues can be used as predictors of stability in such a higher dimensional framework. We investigate eigenvalues of positive real part, and found that complex eigenvalues with a polar angle of 45◦ lead to more stable dynamics than real eigenvalues with the same absolute value. For the real eigenvalues we find a change from stable to unstable dynamics inside the unit circle, which is in line with the findings from the one dimensional case. In order to reproduce the decisions being made in individual time steps, simple models like an adaptive rule are often sufficient. In order to reproduce long run dynamics, we develop a two dimensional Heuristic Switching Model. We use this model to predict the stability of systems with eigenvalues which we did not test experimentally.

Keywords: Learning to Forecast Experiment, Heuristic Switching Model

JEL Classification: C92, E32, G17

Suggested Citation

Levelt, Eva and Hommes, Cars H. and Hennequin, Myrna, Planar Learning to Forecast Market Games (June 30, 2021). Available at SSRN: https://ssrn.com/abstract=3882461 or http://dx.doi.org/10.2139/ssrn.3882461

Eva Levelt (Contact Author)

University of Amsterdam, Faculty of Economics and Business (FEB), Students ( email )

Amsterdam
Netherlands

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB
Netherlands

Cars H. Hommes

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

CeNDEF, Amsterdam School of Economics, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://https://www.uva.nl/en/profile/h/o/c.h.hommes/c.h.hommes.html

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Myrna Hennequin

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

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