 Agent-Based Modeling of Price Discovery and Excessive Volatility in Financial MarketsShu-Heng Chen and Chung-Chih Liao
No 165, Computing in Economics and Finance 2001 from Society for Computational Economics Abstract: This paper studies the behavior of price discovery within a context of an agent based stock market in which the twin assumptions namely, rational expectations and the representative agents normally made in mainstream economics, are removed. In this model, traders stochastically update their forecasts by searching the business school whose evolution is driven by genetic programming. Via these agent based simulations, it is found that, except for some extreme cases, the mean prices generated from these artificial markets deviate from the homogeneous rational expectation equilibrium (HREE) prices no more than by 20%. This figure provides us a rough idea on how different we can possibly be when the twin assumptions are not taken. Furthermore, while the HREE price should be a deterministic constant in all of our simulations, the artificial price series generated exhibit quite wild fluctuation, which may be coined as the well-known excessive volatility in finance. Keywords: Price Discovery; Homogeneous Rational Expectation Equilibrium; Genetic Programming; Agent-Based Computational Finance; Excessive Volatility (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf1:165 Access Statistics for this paper More papers in Computing in Economics and Finance 2001 from Society for Computational Economics Contact information at EDIRC. |
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