An Agent-Based Model to Explain the Emergence of Stylised Facts in Log Returns
Elena Green and
Daniel M. Heffernan
Papers from arXiv.org
This paper outlines an agent-based model of a simple financial market in which a single asset is available for trade by three different types of traders. The model was first introduced in the PhD thesis of one of the authors, see reference . The simulated log returns are examined for the presence of the stylised facts of financial data. The features of leptokurtosis, volatility clustering and aggregational Gaussianity are especially highlighted and studied in detail. The following ingredients are found to be essential for the production of these stylised facts: the memory of noise traders who make random trade decisions; the inclusion of technical traders that trade in line with trends in the price and the inclusion of fundamental traders who know the "fundamental value" of the stock and trade accordingly. When these three basic types of traders are included log returns are produced with a leptokurtic distribution and volatility clustering as well as some further statistical features of empirical data. This enhances and broadens our understanding of the fundamental processes involved in the production of empirical data by the market.
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