From market games to real-world markets

This paper uses the development of multi-agent market models to present a unified approach to the joint questions of how financial market movements may be simulated, predicted, and hedged against. We first present the results of agent-based market simulations in which traders equipped with simple buy/sell strategies and limited information compete in speculatory trading. We examine the effect of different market clearing mechanisms and show that implementation of a simple Walrasian auction leads to unstable market dynamics. We then show that a more realistic out-of-equilibrium clearing process leads to dynamics that closely resemble real financial movements, with fat-tailed price increments, clustered volatility and high volume autocorrelation. We then show that replacing the `synthetic' price history used by these simulations with data taken from real financial time-series leads to the remarkable result that the agents can collectively learn to identify moments in the market where profit is attainable. Hence on real financial data, the system as a whole can perform better than random. We then employ the formalism of Bouchaud in conjunction with agent based models to show that in general risk cannot be eliminated from trading with these models. We also show that, in the presence of transaction costs, the risk of option writing is greatly increased. This risk, and the costs, can however be reduced through the use of a delta-hedging strategy with modified, time-dependent volatility structure. Received 30 August 2000     

Distinguishing manipulated stocks via trading network analysis

Manipulation is an important issue for both developed and emerging stock markets. For the study of manipulation, it is critical to analyze investor behavior in the stock market. In this paper, an analysis of the full transaction records of over a hundred stocks in a one-year period is conducted. For each stock, a trading network is constructed to characterize the relations among its investors. In trading networks, nodes represent investors and a directed link connects a stock seller to a buyer with the total trade size as the weight of the link, and the node strength is the sum of all edge weights of a node. For all these trading networks, we find that the node degree and node strength both have tails following a power-law distribution. Compared with non-manipulated stocks, manipulated stocks have a high lower bound of the power-law tail, a high average degree of the trading network and a low correlation between the price return and the seller-buyer ratio. These findings may help us to detect manipulated stocks.     

Trading model with pair pattern strategies

A simple trading model based on pair pattern strategy space with holding periods is proposed. Power-law behavior is observed for the return variance σ², the price impact H and the predictability K for both models, with linear and square root impact functions. The sum of the traders’ wealth displays a positive value for the model with a square root price impact function, and a qualitative explanation is given based on the observation of the conditional excess demand 〈A|u〉. The cumulative wealth distribution also obeys a power-law behavior with an exponent close to that of real markets. An evolutionary trading model is further proposed. The elimination mechanism effectively changes the behavior of traders, and a power-law behavior is observed in the measure of zero return distribution P(r=0). The trading model with other types of traders, e.g., traders with the MG’s strategies and producers, are also carefully studied.     

A structural model of market dynamics,and why it matters

In this paper, we explore an approach to understanding price fluctuations within a market via considerations of functional dependencies between asset prices. Interestingly, this approach suggests a class of models of a type used earlier to describe the dynamics of real and artificial neural networks. Statistical physics approaches turn out to be suitable for an analysis of their collective properties. In this paper, we first motivate the basic phenomenology and modelling arguments before moving on to discussing some major issues with inference and empirical verification. In particular, we focus on the natural creation of market states through the inclusion of interactions and how these then interfere with inference. This is primarily addressed in a synthetic setting. Finally we investigate real data to test the ability of our approach to capture some key features of the behaviour of financial markets.     

Experimental evidence for the interplay between individual wealth and transaction network

We conduct a market experiment with human agents in order to explore the structure of transaction networks and to study the dynamics of wealth accumulation. The experiment is carried out on our platform for 97 days with 2,095 effective participants and 16,936 times of transactions. From these data, the hybrid distribution (log-normal bulk and power-law tail) in the wealth is observed and we demonstrate that the transaction networks in our market are always scale-free and disassortative even for those with the size of the order of few hundred. We further discover that the individual wealth is correlated with its degree by a power-law function which allows us to relate the exponent of the transaction network degree distribution to the Pareto index in wealth distribution.     

Impact of asymmetric information on market evolution

In this paper, we propose an agent-based model to study the impact of asymmetric information on market evolution. In each period, buyers and sellers are randomly matched. The condition for the transaction being performed depends on the comparison between valuations of buyers and sellers on the good they trade. We introduce cognitive capability to describe buyers’ valuation on a good and valuation ratio to reflect the gap between two kinds of traders’ valuations on the good. The market outcomes are sorted into four phases in the parameter space of these two variables. Computer simulations show us critical phenomena of phase transition. The model proposed herein is able to demonstrate how the asymmetry of information leads to the adverse selection effect. The model also explains the coexistence of low- and high-quality goods in a market with asymmetric information. We analyze the condition under which the asymmetry of information might not take its effect and find that the gap of valuations between buyers and sellers plays the key role.     

New approaches in agent-based modeling of complex financial systems

Agent-based modeling is a powerful simulation technique to understand the collective behavior and microscopic interaction in complex financial systems. Recently, the concept for determining the key parameters of agent-based models from empirical data instead of setting them artificially was suggested. We first review several agent-based models and the new approaches to determine the key model parameters from historical market data. Based on the agents’ behaviors with heterogeneous personal preferences and interactions, these models are successful in explaining the microscopic origination of the temporal and spatial correlations of financial markets. We then present a novel paradigm combining big-data analysis with agent-based modeling. Specifically, from internet query and stock market data, we extract the information driving forces and develop an agent-based model to simulate the dynamic behaviors of complex financial systems.     

Effect of Trader Composition on Stock Market

In this study, we build a double auction market model, which containstwo types of agent traders, i.e., the noise traders and fundamentalists, to investigate the effect of the trader composition on the stock market. It is found that, the non-trivial Hurst exponent and the fat-tailed distribution of transaction prices can be observed at any ratio of the noise traders. Analyses on the price variation properties, including the Hurst exponent and the price variation region, show that these properties are stable when the ratio is moderate. However, the non-price variation properties, including the trading volume and the profitability of the two kinds of agents, do not keep stable untrivially in any interval of the ratio of noise traders.     

Graph kernels,hierarchical clustering,and network community structure: experiments and comparative analysis

There has been a quickly growing interest in properties of complex networks, such as the small world property, power-law degree distribution, network transitivity, and community structure, which seem to be common to many real world networks. In this study, we consider the community property which is also found in many real networks. Based on the diffusion kernels of networks, a hierarchical clustering approach is proposed to uncover the community structure of different extent of complex networks. We test the method on some networks with known community structures and find that it can detect significant community structure in these networks. Comparison with related methods shows the effectiveness of the method.     

Understanding agent-based models of financial markets: A bottom–up approach based on order parameters and phase diagrams

We describe a bottom–up framework, based on the identification of appropriate order parameters and determination of phase diagrams, for understanding progressively refined agent-based models and simulations of financial markets. We illustrate this framework by starting with a deterministic toy model, whereby N$N$ independent traders buy and sell M$M$ stocks through an order book that acts as a clearing house. The price of a stock increases whenever it is bought and decreases whenever it is sold. Price changes are updated by the order book before the next transaction takes place. In this deterministic model, all traders based their buy decisions on a call utility function, and all their sell decisions on a put utility function. We then make the agent-based model more realistic, by either having a fraction _fb$f_b$ of traders buy a random stock on offer, or a fraction _fs$f_s$ of traders sell a random stock in their portfolio. Based on our simulations, we find that it is possible to identify useful order parameters from the steady-state price distributions of all three models. Using these order parameters as a guide, we find three phases: (i) the dead market; (ii) the boom market; and (iii) the jammed market in the phase diagram of the deterministic model. Comparing the phase diagrams of the stochastic models against that of the deterministic model, we realize that the primary effect of stochasticity is to eliminate the dead market phase.     

An interacting-agent model of financial markets from the viewpoint of nonextensive statistical mechanics

In this paper we present an interacting-agent model of stock markets. We describe a stock market through an Ising-like model in order to formulate the tendency of traders to be influenced by the other traders’ investment attitudes [Kaizoji, Physica A 287 (2000) 493], and formulate the traders’ decision-making regarding investment as the maximum entropy principle for nonextensive entropy [C. Tsallis, J. Stat. Phys. 52 (1988) 479]. We demonstrate that the equilibrium probability distribution function of the traders’ investment attitude is the q-exponential distribution. We also show that the power-law distribution of the volatility of price fluctuations, which is often demonstrated in empirical studies can be explained naturally by our model which originates in the collective crowd behavior of many interacting-agents.     

An agent-based model of stock markets incorporating momentum investors

It has been widely accepted that there exist investors who adopt momentum strategies in real stock markets. Understanding the momentum behavior is of both academic and practical importance. For this purpose, we propose and study a simple agent-based model of trading incorporating momentum investors and random investors. The random investors trade randomly all the time. The momentum investors could be idle, buying or selling, and they decide on their action by implementing an action threshold that assesses the most recent price movement. The model is able to reproduce some of the stylized facts observed in real markets, including the fat-tails in returns, weak long-term correlation and scaling behavior in the kurtosis of returns. An analytic treatment of the model relates the model parameters to several quantities that can be extracted from real data sets. To illustrate how the model can be applied, we show that real market data can be used to constrain the model parameters, which in turn provide information on the behavior of momentum investors in different markets.     

Influence of a network structure on the network effect in the communication service market

In this study, we analyze the network effect in a model of a personal communication market, by using a multi-agent based simulation approach. We introduce into the simulation model complex network structures as the interaction patterns of agents. With complex network models, we investigate the dynamics of a market in which two providers are competing. We also examine the structure of networks that affect the complex behavior of the market. By a series of simulations, we show that the structural properties of complex networks, such as the clustering coefficient and degree correlation, have a major influence on the dynamics of the market. We find that the network effect is increased if the interaction pattern of agents is characterized by a high clustering coefficient, or a positive degree correlation. We also discuss a suitable model of the interaction pattern for reproducing market dynamics in the real world, by performing simulations using real data of a social network.     

Non-equilibrium stochastic model for stock exchange market

We study the effect of the topology of industrial relationship (IR) between the companies in a stock exchange market on the universal features in the market. For this we propose a stochastic model for stock exchange markets based on the behavior of technical traders. From the numerical simulations we measure the return distribution, P(R)$P\left(R\right)$, and the autocorrelation function of the volatility, C(T)$C\left(T\right)$, and find that the observed universal features in real financial markets are originated from the heterogeneity of IR network topology. Moreover, the heterogeneous IR topology can also explain Zipf–Pareto’s law for the distribution of market value of equity in the real stock exchange markets.     

Modeling the clustering in citation networks

For the study of citation networks, a challenging problem is modeling the high clustering. Existing studies indicate that the promising way to model the high clustering is a copying strategy, i.e., a paper copies the references of its neighbor as its own references. However, the line of models highly underestimates the number of abundant triangles observed in real citation networks and thus cannot well model the high clustering. In this paper, we point out that the failure of existing models lies in that they do not capture the connecting patterns among existing papers. By leveraging the knowledge indicated by such connecting patterns, we further propose a new model for the high clustering in citation networks. Experiments on two real world citation networks, respectively from a special research area and a multidisciplinary research area, demonstrate that our model can reproduce not only the power-law degree distribution as traditional models but also the number of triangles, the high clustering coefficient and the size distribution of co-citation clusters as observed in these real networks.     

Intra-group and inter-group trading differentiation analysis: A new approach for detecting the effect of trading volume on stock market fluctuations

Analyzing statistical properties of stock market data using statistical physics has received much attention from physicists and economists in recent years. Although some statistical characteristics of stock market data such as power-low tails of stock returns have become established fact, behavior of other related variables such as trading volume are less studied. In this paper, in order to examine the impact of trading volume on statistical properties of stock market returns, different trading behavior of different traders in Tehran Stock Exchange is analyzed. We define a new coefficient which measures the equilibrium between these different forces affecting the market at any given trading day. By adjusting market returns by this coefficient, we also assessed the impact of these forces on the statistical properties of stock market returns.     

Nonlinear bivariate dependency of price-volume relationships in agricultural commodity futures markets: A perspective from Multifractal Detrended Cross-Correlation Analysis

Nonlinear dependency between characteristic financial and commodity market quantities (variables) is crucially important, especially between trading volume and market price. Studies on nonlinear dependency between price and volume can provide practical insights into market trading characteristics, as well as the theoretical understanding of market dynamics. Actually, nonlinear dependency and its underlying dynamical mechanisms between price and volume can help researchers and technical analysts in understanding the market dynamics by integrating the market variables, instead of investigating them in the current literature. Therefore, for investigating nonlinear dependency of price-volume relationships in agricultural commodity futures markets in China and the US, we perform a new statistical test to detect cross-correlations and apply a new methodology called Multifractal Detrended Cross-Correlation Analysis (MF-DCCA), which is an efficient algorithm to analyze two spatially or temporally correlated time series. We discuss theoretically the relationship between the bivariate cross-correlation exponent and the generalized Hurst exponents for time series of respective variables. We also perform an empirical study and find that there exists a power-law cross-correlation between them, and that multifractal features are significant in all the analyzed agricultural commodity futures markets.     

A neighbourhood evolving network model

Many social, technological, biological and economical systems are best described by evolved network models. In this short Letter, we propose and study a new evolving network model. The model is based on the new concept of neighbourhood connectivity, which exists in many physical complex networks. The statistical properties and dynamics of the proposed model is analytically studied and compared with those of Barabási–Albert scale-free model. Numerical simulations indicate that this network model yields a transition between power-law and exponential scaling, while the Barabási–Albert scale-free model is only one of its special (limiting) cases. Particularly, this model can be used to enhance the evolving mechanism of complex networks in the real world, such as some social networks development.     

一种新型电力网络局域世界演化模型

现实世界中的许多系统都可以用复杂网络来描述,电力系统是人类创造的最为复杂的网络系统之一.当前经典的网络模型与实际电力网络存在较大差异.从电力网络本身的演化机理入手,提出并研究了一种可以模拟电力网络演化规律的新型局域世界网络演化模型.理论分析表明该模型的度分布具有幂尾特性,且幂律指数在3—∞之间可调.最后通过对中国北方电网和美国西部电网的仿真以及和无标度网络、随机网络的对比,验证了该模型可以很好地反映电力网络的演化规律,并且进一步证实了电力网络既不是无标度网络,也不是完全的随机网络. 关键词： 电力网络 演化模型 局域世界 幂律分布