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Mean field limit of a behavioral financial market model

Torsten Trimborn, Martin Frank and Stephan Martin

Physica A: Statistical Mechanics and its Applications, 2018, vol. 505, issue C, 613-631

Abstract: In the past decade there has been a growing interest in agent-based econophysical financial market models. The goal of these models is to gain further insights into stylized facts of financial data. We derive the mean field limit of the econophysical Cross model (Cross, 2005) and show that the kinetic limit is a good approximation of the original model. Our kinetic model is able to replicate some of the most prominent stylized facts, namely fat-tails of asset returns, uncorrelated stock price returns and volatility clustering. Interestingly, psychological misperceptions of investors can be accounted to be the origin of the appearance of stylized facts. The mesoscopic model allows us to study the model analytically. We derive steady state solutions and entropy bounds of the deterministic skeleton. These first analytical results already guide us to explanations for the complex dynamics of the model.

Keywords: Mean field limit; Stock market; Kinetic model; Agent-based models; Behavioral finance; Stylized facts (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:phsmap:v:505:y:2018:i:c:p:613-631