EXACT SOLUTION OF A MODEL FOR CROWDING AND INFORMATION TRANSMISSION IN FINANCIAL MARKETS

R. D'Hulst () and G. J. Rodgers ()
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R. D'Hulst: Department of Mathematical Sciences, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK
G. J. Rodgers: Department of Mathematical Sciences, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK

International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 04, 609-616

Abstract: An exact solution is presented to a model that mimics the crowding effect in financial markets which arises when groups of agents share information. We show that the size distribution of groups of agents has a power law tail with an exponential cut-off. As the size of these groups determines the supply and demand balance, this implies heavy tails in the distribution of price variation. The moments of the distribution are calculated, as well as the kurtosis. We find that the kurtosis is large for all model parameter values and that the model is not self-organizing.

Keywords: Herding; economy; market organization; statistics (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (4)

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DOI: 10.1142/S0219024900000784

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