Market Dynamics as a Consequence of Local Complementarity and Global Substitutability in Agent's Strategies

24 Pages Posted: 2 Nov 2005 Last revised: 23 Aug 2014

See all articles by Michele Bagella

Michele Bagella

University of Rome Tor Vergata - Faculty of Economics

Rocco Ciciretti

Tor Vergata University of Rome - Department of Economics and Finance

Gabriele Susinno

Financial Advisory Services

Abstract

Empirical analysis of financial markets has shown number of stylized facts such as heavy tails or volatility bursts which are difficult to explain in terms of evolution of fundamental economic variables. Indeed the non-Gaussian, non-stable character of empirical distributions, such as excess demand or stock returns, demonstrate the weakness of any independent agent approach to model the real market. Starting from the existing literature on the characterization of the behavior of random economies with many interacting agents, we identify a set of microeconomic interaction rules which could help to explain the macroeconomic observed market behavior. Following the work of Bornholdt and extending the Brock and Durlauf work, we will consider interacting agents whose payoff exhibit both a strategic complementarity with their nearest neighbors actions and an eventual global substitutability with the global market state. In this set-up we reconstruct a price process related to the imbalance between buyers and sellers. Finally we investigate how the frustration resulting from the tendency of local imitation, with an additional coupling with the average state of the system reproduces main observed stylized facts of real financial markets. We show how in this framework even the largest crash may emerge as a natural intrinsic metastable dynamics of the system induced by a collective phenomena such as crowd effects or herd behavior.

Suggested Citation

Bagella, Michele and Ciciretti, Rocco and Susinno, Gabriele, Market Dynamics as a Consequence of Local Complementarity and Global Substitutability in Agent's Strategies. Available at SSRN: https://ssrn.com/abstract=831764 or http://dx.doi.org/10.2139/ssrn.831764

Michele Bagella

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Rocco Ciciretti

Tor Vergata University of Rome - Department of Economics and Finance ( email )

Via Columbia, 2
Roma, 00133
Italy
+39 06 72595925 (Phone)

HOME PAGE: http://www.roccociciretti.com/

Gabriele Susinno (Contact Author)

Financial Advisory Services ( email )

Ch. de la Pierreuse 5
Vesenaz, Geneva
Switzerland
+41786256040 (Phone)

HOME PAGE: http://www.ipsedixitart.com

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