Limit Distribution of Evolving Strategies in Financial Markets

Carl Chiarella and Corrado Di Guilmi

No 294, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: In this paper we model a financial market composed of agents with heterogeneous beliefs who change their strategy over time. We propose two different solution methods which lead to two different types of endogenous dynamics. The first makes use of the maximum entropy approach to obtain an exponential type probability function for strategies, analogous to the well known Brock and Hommes (1997) model, but with the endogenous specification for the intensity of choice parameter, which varies over time as a consequence of the relative performances of each strategy. The second type of dynamics is obtained by setting up a master equation and solving it using recently developed asymptotic solution techniques, which yield a system of differential equations describing the evolution of the share of each strategy in the market. The performance sof the two solutions are then compared and contrasted with the empirical evidence.

Pages: 28 pages
Date: 2011-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp294.pdf (application/pdf)

Related works:
Journal Article: The limit distribution of evolving strategies in financial markets (2015)
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:uts:rpaper:294

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().