Reverse Engineering Financial Markets with Majority and MinorityGames using Genetic Algorithms

Judith Wiesinger, Didier Sornette and Jeffrey Satinover
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Judith Wiesinger: ETH Zurich
Didier Sornette: ETH Zurich and Swiss Finance Institute
Jeffrey Satinover: ETH Zurich

No 10-08, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Using virtual stock markets with artificial interacting software in- vestors, aka agent-based models (ABMs), we present a method to reverse engineer real-world financial time series. We model financial markets as made of a large number of interacting boundedly rational agents. By op- timizing the similarity between the actual data and that generated by the reconstructed virtual stock market, we obtain parameters and strategies, which reveal some of the inner workings of the target stock market. We validate our approach by out-of-sample predictions of directional moves of the Nasdaq Composite Index.

Keywords: reverse-engineering; financial markets; agent-based models; genetic algorithms; forecast; trading strategies; market regimes (search for similar items in EconPapers)
JEL-codes: C51 C53 C63 C73 G17 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2010-03
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1008

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