Onset of Financial Instability Studied via Agent-based Models

Liu, Yifang; Vitting-Andersen, Jørgen; Peretti, Philippe de

doi:10.1016/b978-1-78548-085-0.50004-2

“…This is a somewhat surprising result since, by definition, this type of game doesn't support trend-following strategies. For further references covering synchronization in experiments and markets, see (Challet and Zhang 1997;Andersen and Sornette 2003;Liu et al 2016). Table 1 decouples at time t + 2, conditioned on the price history → µ = (010) at time t. Table 1.…”

Section: Price History Predictionmentioning

confidence: 99%

Three Different Ways Synchronization Can Cause Contagion in Financial Markets

Massad

¹

,

Andersen

²

2018

Risks

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We introduce tools to capture the dynamics of three different pathways, in which the synchronization of human decision-making could lead to turbulent periods and contagion phenomena in financial markets. The first pathway is caused when stock market indices, seen as a set of coupled integrate-and-fire oscillators, synchronize in frequency. The integrate-and-fire dynamics happens due to "change blindness", a trait in human decision-making where people have the tendency to ignore small changes, but take action when a large change happens. The second pathway happens due to feedback mechanisms between market performance and the use of certain (decoupled) trading strategies. The third pathway occurs through the effects of communication and its impact on human decision-making. A model is introduced in which financial market performance has an impact on decision-making through communication between people. Conversely, the sentiment created via communication has an impact on financial market performance. The methodologies used are: agent based modeling, models of integrate-and-fire oscillators, and communication models of human decision-making.

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“…Finally, the sum of the actions of all agents determines the next price move: if positive, the price moves up, if negative, the price moves down. The figure is taken from [14].…”

Section: Synchronization Through Indirect Interaction Of Individuals:mentioning

confidence: 99%

“…The inequality (2) gives the condition for synchronization to happen via indirect interaction of traders through the price formation of an asset. Before considering synchronization in real markets [14], one must obviously begin by showing its presence in models, as well as in experiments. Figure 3 proves the existence of synchronization via decoupling in models like the Minority Game.…”

Section: Synchronization Through Indirect Interaction Of Individuals:mentioning

confidence: 99%

“…This is a somewhat surprising result since by definition this type of game doesn't support trend-following strategies. For further references covering synchronization in experiments and markets, see [14][15][16]. .…”

Section: Synchronization Through Indirect Interaction Of Individuals:mentioning

confidence: 99%

“…Representation of how the trading strategy inTable 1decouples at time t+2, conditioned on the price history ⃗ at time t. Figure taken from[14].…”

mentioning

confidence: 99%

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Three Different Ways Synchronization can Cause Contagion in Financial Markets

Andersen¹,

Masaad²

2018

Preprint

0

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We introduce tools to capture the dynamics of three different pathways, in which the synchronization of human decision making could lead to turbulent periods and contagion phenomena in financial markets. The first pathway is caused when stock market indices, seen as a set of coupled integrate-and-fire oscillators, synchronize in frequency. The integrate-and-fire dynamics happens due to "change blindness", a trait in human decision making where people have the tendency to ignore small changes, but take action when a large change happens. The second pathway happens due to feedback mechanisms between market performance and the use of certain (decoupled) trading strategies. The third pathway occurs through the effects of communication and its impact on human decision making. A model is introduced in which financial market performance has an impact on decision making through communication between people. Conversely, the sentiment created via communication has an impact on financial market performance.

show abstract

Three Different Ways Synchronization Can Cause Contagion in Financial Markets

Massad¹,

Andersen

²

2019

SSRN Journal

0

View full text Add to dashboard Cite

We introduce tools to capture the dynamics of three different pathways, in which the synchronization of human decision-making could lead to turbulent periods and contagion phenomena in financial markets. The first pathway is caused when stock market indices, seen as a set of coupled integrate-and-fire oscillators, synchronize in frequency. The integrate-and-fire dynamics happens due to "change blindness", a trait in human decision-making where people have the tendency to ignore small changes, but take action when a large change happens. The second pathway happens due to feedback mechanisms between market performance and the use of certain (decoupled) trading strategies. The third pathway occurs through the effects of communication and its impact on human decision-making. A model is introduced in which financial market performance has an impact on decision-making through communication between people. Conversely, the sentiment created via communication has an impact on financial market performance. The methodologies used are: agent based modeling, models of integrate-and-fire oscillators, and communication models of human decision-making.

show abstract

Onset of Financial Instability Studied via Agent-based Models

Cited by 3 publications

References 20 publications

Three Different Ways Synchronization Can Cause Contagion in Financial Markets

Three Different Ways Synchronization Can Cause Contagion in Financial Markets

Three Different Ways Synchronization can Cause Contagion in Financial Markets

Three Different Ways Synchronization Can Cause Contagion in Financial Markets

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