Network hierarchy in Kirman's ant model: fund investment can create systemic risk

Simone Alfarano, Mishael Milaković and Matthias Raddant

No 2009-09, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: Kirman's ant model has been used to characterize the expectation formation of financial investors who are prone to herding. The model's original version suffers from the problem of N-dependence: its ability to replicate the statistical features of financial returns vanishes once the system size N is increased. In a generalized version of the ant model, the network structure connecting agents turns out to determine whether or not the model is N-dependent. We investigate a class of hierarchical networks in the generalized model that presumably reflect the institutional heterogeneity of financial markets. These network structures do overcome the problem of N-dependence, but at the same time they also increase system-wide volatility. Thus network structure becomes an auxiliary source of volatility in addition to the behavioral heterogeneity of interacting agents.

Keywords: herding; financial markets; networks; N-dependence; systemic risk (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-net
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:200909

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