Evolutionary financial market models

A. Ponzi, Y. Aizawa

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

We study computer simulations of two financial market models, the second a simplified model of the first. The first is a model of the self-organized formation and breakup of crowds of traders, motivated by the dynamics of competitive evolving systems which shows interesting self-organized critical (SOC)-type behaviour without any fine tuning of control parameters. This SOC-type avalanching and stasis appear as realistic volatility clustering in the price returns time series. The market becomes highly ordered at `crashes' but gradually loses this order through randomization during the intervening stasis periods. The second model is a model of stocks interacting through a competitive evolutionary dynamic in a common stock exchange. This model shows a self-organized `market-confidence'. When this is high the market is stable but when it gets low the market may become highly volatile. Volatile bursts rapidly increase the market confidence again. This model shows a phase transition as temperature parameter is varied. The price returns time series in the transition region is very realistic power-law truncated Levy distribution with clustered volatility and volatility superdiffusion. This model also shows generally positive stock cross-correlations as is observed in real markets. This model may shed some light on why such phenomena are observed.

Original languageEnglish
Pages (from-to)507-523
Number of pages17
JournalPhysica A: Statistical Mechanics and its Applications
Volume287
Issue number3-4
DOIs
Publication statusPublished - 2000 Dec 1

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Market Model
Financial Markets
volatility
Return Time
Volatiles
Model
Volatility
Confidence
Time series
confidence
Volatility Clustering
Lévy Distribution
Superdiffusion
Truncated Distributions
Competitive System
Evolutionary Dynamics
Breakup
crashes
Crash
Cross-correlation

ASJC Scopus subject areas

  • Mathematical Physics
  • Statistical and Nonlinear Physics

Cite this

Evolutionary financial market models. / Ponzi, A.; Aizawa, Y.

In: Physica A: Statistical Mechanics and its Applications, Vol. 287, No. 3-4, 01.12.2000, p. 507-523.

Research output: Contribution to journalArticle

Ponzi, A. ; Aizawa, Y. / Evolutionary financial market models. In: Physica A: Statistical Mechanics and its Applications. 2000 ; Vol. 287, No. 3-4. pp. 507-523.
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