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Consentaneous agent-based and stochastic model of the financial markets

PloS one, 2014-07, Vol.9 (7), p.e102201-e102201 [Peer Reviewed Journal]

COPYRIGHT 2014 Public Library of Science ;COPYRIGHT 2014 Public Library of Science ;2014 Gontis, Kononovicius. This is an open-access article distributed under the terms of the Creative Commons Attribution License: http://creativecommons.org/licenses/by/4.0/ (the “License”), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;2014 Gontis, Kononovicius 2014 Gontis, Kononovicius ;ISSN: 1932-6203 ;EISSN: 1932-6203 ;DOI: 10.1371/journal.pone.0102201 ;PMID: 25029364

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  • Title:
    Consentaneous agent-based and stochastic model of the financial markets
  • Author: Gontis, Vygintas ; Kononovicius, Aleksejus
  • Preis, Tobias
  • Subjects: Agent-based models ; Differential equations ; Empirical analysis ; Finance ; Financial analysis ; Financial Management ; Financial markets ; Fluctuations ; Herding ; Information flow ; Markets ; Mathematical models ; Modelling ; Models, Theoretical ; Noise ; Physical Sciences ; Physics ; Probability ; Random noise ; Social Sciences ; Stochastic models ; Stochastic Processes ; Stochasticity ; Stock exchanges ; Stock-exchange ; Theoretical physics
  • Is Part Of: PloS one, 2014-07, Vol.9 (7), p.e102201-e102201
  • Description: We are looking for the agent-based treatment of the financial markets considering necessity to build bridges between microscopic, agent based, and macroscopic, phenomenological modeling. The acknowledgment that agent-based modeling framework, which may provide qualitative and quantitative understanding of the financial markets, is very ambiguous emphasizes the exceptional value of well defined analytically tractable agent systems. Herding as one of the behavior peculiarities considered in the behavioral finance is the main property of the agent interactions we deal with in this contribution. Looking for the consentaneous agent-based and macroscopic approach we combine two origins of the noise: exogenous one, related to the information flow, and endogenous one, arising form the complex stochastic dynamics of agents. As a result we propose a three state agent-based herding model of the financial markets. From this agent-based model we derive a set of stochastic differential equations, which describes underlying macroscopic dynamics of agent population and log price in the financial markets. The obtained solution is then subjected to the exogenous noise, which shapes instantaneous return fluctuations. We test both Gaussian and q-Gaussian noise as a source of the short term fluctuations. The resulting model of the return in the financial markets with the same set of parameters reproduces empirical probability and spectral densities of absolute return observed in New York, Warsaw and NASDAQ OMX Vilnius Stock Exchanges. Our result confirms the prevalent idea in behavioral finance that herding interactions may be dominant over agent rationality and contribute towards bubble formation.
  • Publisher: United States: Public Library of Science
  • Language: English
  • Identifier: ISSN: 1932-6203
    EISSN: 1932-6203
    DOI: 10.1371/journal.pone.0102201
    PMID: 25029364
  • Source: Public Library of Science (PLoS) Journals Open Access
    Open Access: PubMed Central
    DOAJ Directory of Open Access Journals
    Geneva Foundation Free Medical Journals at publisher websites
    AUTh Library subscriptions: ProQuest Central
    MEDLINE
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