Modelling Financial Markets by Self-Organized Criticality

We present a financial market model, characterized by self-organized criticality, that is able to generate endogenously a realistic price dynamics and to reproduce well-known stylized facts. We consider a community of heterogeneous traders, composed by chartists and fundamentalists, and focus on the...

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Bibliographic Details
Published inarXiv.org
Main Authors Biondo, A E, Pluchino, A, Rapisarda, A
Format Paper Journal Article
LanguageEnglish
Published Ithaca Cornell University Library, arXiv.org 08.10.2015
Subjects
Communities
Economic models
Fragility
Information dissemination
Markets
Physics - Physics and Society
Quantitative Finance - Statistical Finance
Variations
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Summary:We present a financial market model, characterized by self-organized criticality, that is able to generate endogenously a realistic price dynamics and to reproduce well-known stylized facts. We consider a community of heterogeneous traders, composed by chartists and fundamentalists, and focus on the role of informative pressure on market participants, showing how the spreading of information, based on a realistic imitative behavior, drives contagion and causes market fragility. In this model imitation is not intended as a change in the agent's group of origin, but is referred only to the price formation process. We introduce in the community also a variable number of random traders in order to study their possible beneficial role in stabilizing the market, as found in other studies. Finally we also suggest some counterintuitive policy strategies able to dampen fluctuations by means of a partial reduction of information.
ISSN:2331-8422
DOI:10.48550/arxiv.1507.04298