On simulation of optimal strategies and Nash equilibrium in the financial market context |
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Authors: | Jonas Mockus |
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Institution: | 1.Institute of Mathematics and Informatics,Vilnius,Lithuania |
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Abstract: | Unlike physical time series, stock market prices may be affected by the predictions made by market participants with conflicting
interests. This is the domain of game theory. Therefore, we propose a Stock Exchange Game Model (SEGM) to model this phenomenon.
In SEGM, player strategies are to set their buying and selling levels for the next iteration via the autoregressive model
AR(p) of order p selected by minimizing deviations from Nash Equilibrium (NE). NE represents the assumption of optimal behavior
by market participants. The objective of SEGM is to simulate financial and other time series that are affected by predictions
of the participants and to test the assumption of optimal player behavior, using a ‘virtual’ stock exchange. The simulation
of SEGM suggests that NE is close to the Wiener model. This is a new explanation of the Random Walk (RW) model of the efficient
market theory. To compare the simulation results with real data, the efficient market hypothesis was also tested, using financial
time series of eight assets. The SEGM software is implemented in Java applets and can be run using a browser with Java support.
The main web site is in . |
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Keywords: | |
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