Subscribe to the gold package and get unlimited access to Shamra Academy
Register a new userHow to grow a bubble: A model of myopic adapting agents
368
0
0.0
(
0
)
Ask ChatGPT about the research
No Arabic abstract
We present a simple agent-based model to study the development of a bubble and the consequential crash and investigate how their proximate triggering factor might relate to their fundamental mechanism, and vice versa. Our agents invest according to their opinion on future price movements, which is based on three sources of information, (i) public information, i.e. news, (ii) information from their friendship network and (iii) private information. Our bounded rational agents continuously adapt their trading strategy to the current market regime by weighting each of these sources of information in their trading decision according to its recent predicting performance. We find that bubbles originate from a random lucky streak of positive news, which, due to a feedback mechanism of these news on the agents strategies develop into a transient collective herding regime. After this self-amplified exuberance, the price has reached an unsustainable high value, being corrected by a crash, which brings the price even below its fundamental value. These ingredients provide a simple mechanism for the excess volatility documented in financial markets. Paradoxically, it is the attempt for investors to adapt to the current market regime which leads to a dramatic amplification of the price volatility. A positive feedback loop is created by the two dominating mechanisms (adaptation and imitation) which, by reinforcing each other, result in bubbles and crashes. The model offers a simple reconciliation of the two opposite (herding versus fundamental) proposals for the origin of crashes within a single framework and justifies the existence of two populations in the distribution of returns, exemplifying the concept that crashes are qualitatively different from the rest of the price moves.
rate research
Read More
We develop a probabilistic consumer choice framework based on information asymmetry between consumers and firms. This framework makes it possible to study market competition of several firms by both quality and price of their products. We find Nash market equilibria and other optimal strategies in various situations ranging from competition of two identical firms to firms of different sizes and firms which improve their efficiency.
We introduce a fully probabilistic framework of consumer product choice based on quality assessment. It allows us to capture many aspects of marketing such as partial information asymmetry, quality differentiation, and product placement in a supermarket.
We consider the problem of designing a derivatives exchange aiming at addressing clients needs in terms of listed options and providing suitable liquidity. We proceed into two steps. First we use a quantization method to select the options that should be displayed by the exchange. Then, using a principal-agent approach, we design a make take fees contract between the exchange and the market maker. The role of this contract is to provide incentives to the market maker so that he offers small spreads for the whole range of listed options, hence attracting transactions and meeting the commercial requirements of the exchange.
Models of spatial firm competition assume that customers are distributed in space and transportation costs are associated with their purchases of products from a small number of firms that are also placed at definite locations. It has been long known that the competition equilibrium is not guaranteed to exist if the most straightforward linear transportation costs are assumed. We show by simulations and also analytically that if periodic boundary conditions in two dimensions are assumed, the equilibrium exists for a pair of firms at any distance. When a larger number of firms is considered, we find that their total equilibrium profit is inversely proportional to the square root of the number of firms. We end with a numerical investigation of the systems behavior for a general transportation cost exponent.
In this paper we analyze Greshams Law, in particular, how the rate of inflow or outflow of currencies is affected by the demand elasticity of arbitrage and the difference in face value ratios inside and outside of a country under a bimetallic system. We find that these equations are very similar to those used to describe drift in systems of free charged particles. In addition, we look at how Greshams Law would play out with multiple currencies and multiple countries under a variety of connecting topologies.
Log in to be able to interact and post comments
comments
Fetching comments
Sign in to be able to follow your search criteria
