A re-examination of the "zero is enough" hypothesis in the emergence of financial stylized facts

Olivier Brandouy, Angelo Corelli, Iryna Veryzhenko and Roger Waldeck ()
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Olivier Brandouy: IAE Paris - Sorbonne Business School
Angelo Corelli: LIU - Linköping University
Iryna Veryzhenko: IAE Paris - Sorbonne Business School
Roger Waldeck: LUSSI - Département Logique des Usages, Sciences sociales et Sciences de l'Information - UEB - Université européenne de Bretagne - European University of Brittany - Télécom Bretagne - IMT - Institut Mines-Télécom [Paris]

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Abstract: In recent years, a growing literature has claimed that market microstructure is sufficient to generate the so-called stylized facts without any reference to behavioral assumptions of market players. Indeed, qualitative stylized-facts can be generated with ZIT but we claim that they are without any quantitative predictive power. We show that at coarse grain, in most of the cases, such qualitative stylized facts hide unrealistic price motions at the intraday level and ill-calibrated return processes as well. Generating "realistic" financial motions that reproduce quantitatively financial distributions is out-of-reach within the pure ZIT framework. To do so, one must increasingly constrain agents' choice sets up to a point where it is hard to claim that behaviour is completely random. In addition we show that even with highly constraining ZIT agents, one cannot reproduce real time series from these. Except in a few cases, neither of the first order moments of ZITs versus real data will be equal. We therefore claim that stylized facts produced by means of ZIT agents are useless for financial engineering.

Date: 2012-10
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Published in Journal of Economic Interaction and Coordination, 2012, 7 (2), pp.223-248

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00951015

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