Abstract:In the past decade there has been a growing interest in agent-based econophysical financial market models. The goal of these models is to gain further insights into stylized facts of financial data. We derive the mean field limit of the econophysical Cross model [7] and show that the kinetic limit is a good approximation of the original model. Our kinetic model is able to replicate some of the most prominent stylized facts, namely fat-tails of asset returns, uncorrelated stock price returns and volatility clus… Show more
“…Alternatively, one may derive Boltzmann type equations out of agent dynamics as shown in [40]. Examples of kinetic models derived from agent-based models are [1,2,40,46,48].…”
Section: Connection To Partial Differential Equationsmentioning
confidence: 99%
“…Finally, we emphasize that a time continuous dynamical system may be translated to mesoscopic descriptions modeled using partial differential equations (PDEs) [32,40]. This limit process leading from microscopic dynamics to a mesoscopic description is at the heart of kinetic theory which has been successfully applied to several ABCEM models in the past [1,2,38,46,48]. Thus, one may see this work as a first step from ABCEM models, mostly formulated as difference equations, to financial market models in the physical or mathematical literature, modeled as PDEs.…”
In science and especially in the economic literature, agent-based modeling has become a widely used modeling approach. These models are often formulated as a large system of difference equations. In this study, we discuss two aspects of numerical modeling for two agent-based computational economic market models: the Levy-Levy-Solomon model and the Franke-Westerhoff model. We derive time-continuous formulations of both models and, for the Levy-Levy-Solomon model, we discuss the impact of the time-scaling on the model behavior. For the Franke-Westerhoff model, we proof that a constraint required in the original model is not necessary for stability of the time-continuous model. It is shown that a semi-implicit discretization of the time-continuous system preserves this unconditional stability. In addition, this semi-implicit discretization can be computed at cost comparable to the original model.
“…Alternatively, one may derive Boltzmann type equations out of agent dynamics as shown in [40]. Examples of kinetic models derived from agent-based models are [1,2,40,46,48].…”
Section: Connection To Partial Differential Equationsmentioning
confidence: 99%
“…Finally, we emphasize that a time continuous dynamical system may be translated to mesoscopic descriptions modeled using partial differential equations (PDEs) [32,40]. This limit process leading from microscopic dynamics to a mesoscopic description is at the heart of kinetic theory which has been successfully applied to several ABCEM models in the past [1,2,38,46,48]. Thus, one may see this work as a first step from ABCEM models, mostly formulated as difference equations, to financial market models in the physical or mathematical literature, modeled as PDEs.…”
In science and especially in the economic literature, agent-based modeling has become a widely used modeling approach. These models are often formulated as a large system of difference equations. In this study, we discuss two aspects of numerical modeling for two agent-based computational economic market models: the Levy-Levy-Solomon model and the Franke-Westerhoff model. We derive time-continuous formulations of both models and, for the Levy-Levy-Solomon model, we discuss the impact of the time-scaling on the model behavior. For the Franke-Westerhoff model, we proof that a constraint required in the original model is not necessary for stability of the time-continuous model. It is shown that a semi-implicit discretization of the time-continuous system preserves this unconditional stability. In addition, this semi-implicit discretization can be computed at cost comparable to the original model.
“…To overcome these problems, it is possible to derive kinetic models based on partial differential equations (PDEs) out of the microscopic particle models, which give us the possibility to study the appearance of stylized facts analytically. There are several examples of such a kinetic approach in the literature [5,6,9,12,13,17,18,20,22,27,28,33,35,46]. We refer also to [42] for a recent survey.…”
In this paper, we introduce a large system of interacting financial agents in which all agents are faced with the decision of how to allocate their capital between a risky stock or a risk-less bond. The investment decision of investors, derived through an optimization, drives the stock price. The model has been inspired by the econophysical Levy-Levy-Solomon model [30]. The goal of this work is to gain insights into the stock price and wealth distribution. We especially want to discover the causes for the appearance of power-laws in financial data. We follow a kinetic approach similar to [33] and derive the mean field limit of the microscopic agent dynamics. The novelty in our approach is that the financial agents apply model predictive control (MPC) to approximate and solve the optimization of their utility function. Interestingly, the MPC approach gives a mathematical connection between the two opposing economic concepts of modeling financial agents to be rational or boundedly rational. Furthermore, this is to our knowledge the first kinetic portfolio model which considers a wealth and stock price distribution simultaneously. Due to the kinetic approach, we can study the wealth and price distribution on a mesoscopic level. The wealth distribution is characterized by a log-normal law. For the stock price distribution, we can either observe a log-normal behavior in the case of long-term investors or a power-law in the case of high-frequency trader. Furthermore, the stock return data exhibit a fat-tail, which is a well known characteristic of real financial data.
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