Price Fluctuations in Market Model with Heterogeneous Trading Strategies

Y. Gao and G. Beni (USA)

Keywords

Heterogeneous trading strategies, stochastic volatility, fat tails, meanreversion, bubble, Cellular Automata.

Abstract

We present a model of market’s dynamics based on heterogeneous trading activities. The price evolution is calculated by simulation on a cellular automaton. Agents in the market trade according to fundamentalist and chartist strategies; and according to a self-learning mechanism dynamically connecting strategies with share holdings. As traders switch strategies they determine a price dynamics characterized by both stochastic drift and stochastic Wiener volatility. We analyze three market scenarios dominated by (1) fundamentalists (2) chartists and (3) neither. The model accounts for mean-reversion, bubble formation and burst phenomena.

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