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
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.
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