Understanding the complex dynamics of stock markets through cellular automata
Sloot, Peter M. A.
Date of Issue2007
School of Computer Engineering
We present a cellular automaton CA model for simulating the complex dynamics of stock markets. Within this model, a stock market is represented by a two-dimensional lattice, of which each vertex stands for a trader. According to typical trading behavior in real stock markets, agents of only two types are adopted: fundamentalists and imitators. Our CA model is based on local interactions, adopting simple rules for representing the behavior of traders and a simple rule for price updating. This model can reproduce, in a simple and robust manner, the main characteristics observed in empirical financial time series. Heavy-tailed return distributions due to large price variations can be generated through the imitating behavior of agents. In contrast to other microscopic simulation MS models, our results suggest that it is not necessary to assume a certain network topology in which agents group together, e.g., a random graph or a percolation network. That is, long-range interactions can emerge from local interactions. Volatility clustering, which also leads to heavy tails, seems to be related to the combined effect of a fast and a slow process: the evolution of the influence of news and the evolution of agents’ activity, respectively. In a general sense, these causes of heavy tails and volatility clustering appear to be common among some notable MS models that can confirm the main characteristics of financial markets.
Physical review E
© 2007 The American Physical Society. This paper was published in Physical Review E and is made available as an electronic reprint (preprint) with permission of The American Physical Society. The paper can be found at the following official DOI:[http://dx.doi.org/10.1103/PhysRevE.75.046116]. One print or electronic copy may be made for personal use only. Systematic or multiple reproduction, distribution to multiple locations via electronic or other means, duplication of any material in this paper for a fee or for commercial purposes, or modification of the content of the paper is prohibited and is subject to penalties under law.