A model of adaptive, market behavior generating positive returns, volatility and system risk

Misha Perepelitsa

Papers from arXiv.org

Abstract: We describe a simple model for speculative trading based on adaptive behavior of economic agents.The adaptive behavior is expressed through a feedback mechanism for changing agents' stock-to-bond ratios, depending on the past performance of their portfolios.The stock price is set according to the demand-supply for the asset derived from the agents' target risk levels. Using the methodology of agent-based modeling we show that agents, acting endogenously and adaptively, create a persistent price bubble. The price dynamics generated by the trading process does not reveal any singularities, however the process is accompanied by growing aggregated risk that indicates increasing likelihood of a crash.

Date: 2018-09
New Economics Papers: this item is included in nep-rmg
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