Financial Markets as Nonlinear Adaptive Evolutionary Systems

Cars Hommes

No 00-03, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: This paper gives an overview of joint work with Buz Brock, on evolutionary adaptive belief systems (ABS) for modelling financial markets. Recent work with Andrea Gaunersdorfer is also reviewed and some recent experimental work on expectation formation in financial markets is also discussed. Financial markets are viewed as evolutionary systems between different, competing trading strategies. Agents are boundedly rational in the sense that they tend to follow strategies that have performed well, according to realized profits or accumulated wealth, in the recent past. Simple technical trading rules may survive evolutionary competition in a heterogeneous world where prices and beliefs co-evolve over time. The evolutionary model explains stylized facts of real markets, such as fat tails and volatility clustering. Although the ABS is very simple, it is able to match the autocorrelation patterns of returns, squared returns and absolute returns of 40 years of S&P 500 data.

Date: 2000
New Economics Papers: this item is included in nep-fmk
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://cendef.uva.nl/binaries/content/assets/subsi ... es.pdf?1417178358286 (application/pdf)

Related works:
Journal Article: Financial markets as nonlinear adaptive evolutionary systems (2001)
Working Paper: Financial Markets as Nonlinear Adaptive Evolutionary Systems (2001)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:00-03

Access Statistics for this paper

More papers in CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands. Contact information at EDIRC.
Bibliographic data for series maintained by Cees C.G. Diks ().