A RANDOM CLUSTER PROCESS APPROACH TO COLLECTIVE MARKET DYNAMICS WITH LOCAL INTERACTIONS

Haiyan Cai () and Kang Chen
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Haiyan Cai: Department of Mathematics and Computer Science, University of Missouri – St. Louis, One University Boulevard, St. Louis, MO 63121, USA
Kang Chen: Division of Economics, Nanyang Technological University, Singapore 639798, Singapore

International Journal of Theoretical and Applied Finance (IJTAF), 2009, vol. 12, issue 02, 251-266

Abstract: In this paper, we adopt an agent-based approach to model collective market dynamics when interactions between the agents in a market are significant. Our model has two special features. First, social groups are formed in a random cluster process which, we believe, mimics the actual formation of social circles. Second, the process is shown to have an equilibrium distribution which gives the highest probability to the market configurations with the maximum total likelihood. With this model we are able to catch some key characteristics of collective dynamics emerged from agent interactions. These characteristics include, for example, a heavy-tailed distribution for the market returns.

Keywords: Random cluster process; agent-based models; Gibbs distribution; social interaction (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1142/S0219024909005178

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