exploring financial instability through agent-based modeling … · 2019-12-14 · useful finance...
TRANSCRIPT
![Page 1: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/1.jpg)
Exploring Financial InstabilityThrough Agent-based ModelingPart 1: Background and Early
Models
Blake LeBaronInternational Business School
Brandeis Universitywww.brandeis.edu/∼blebaron
Mini courseCIGI-INET: False Dichotomies
![Page 2: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/2.jpg)
Course Road Map
Course Road Map
What AreAgent-basedModels?
Agent-basedFinancial Markets
Features of FinancialTime Series
Design Questions
A RepresentativeSimple Model
LeBaron CIGI/INET November 2012 – 2 / 38
![Page 3: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/3.jpg)
Main goals and philosophy
LeBaron CIGI/INET November 2012 – 3 / 38
⊲ Basic modeling tools
![Page 4: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/4.jpg)
Main goals and philosophy
LeBaron CIGI/INET November 2012 – 3 / 38
⊲ Basic modeling tools
⊲ Short guide to literature
![Page 5: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/5.jpg)
Main goals and philosophy
LeBaron CIGI/INET November 2012 – 3 / 38
⊲ Basic modeling tools
⊲ Short guide to literature
⊲ Contributions to understanding financial marketdynamics
![Page 6: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/6.jpg)
Main goals and philosophy
LeBaron CIGI/INET November 2012 – 3 / 38
⊲ Basic modeling tools
⊲ Short guide to literature
⊲ Contributions to understanding financial marketdynamics
⊲ Macro economic connections
![Page 7: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/7.jpg)
Where are we going?
LeBaron CIGI/INET November 2012 – 4 / 38
⊲ Part 1:
•What are agent-based models?
•Simple models from finance
![Page 8: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/8.jpg)
Where are we going?
LeBaron CIGI/INET November 2012 – 4 / 38
⊲ Part 1:
•What are agent-based models?
•Simple models from finance
⊲ Part 2:
•Adaptation and time series
•Heterogeneous gain learning
![Page 9: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/9.jpg)
Where are we going?
LeBaron CIGI/INET November 2012 – 4 / 38
⊲ Part 1:
•What are agent-based models?
•Simple models from finance
⊲ Part 2:
•Adaptation and time series
•Heterogeneous gain learning
⊲ Part 3:
•Current directions in agent design and applications
•Empirical validation
• Instability and macro connections
![Page 10: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/10.jpg)
Overview: Part 1
LeBaron CIGI/INET November 2012 – 5 / 38
Course Road Map
What Are Agent-based Models?
Agent-based Financial Markets
Features of Financial Time Series
Design Questions
A Representative Simple Model
![Page 11: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/11.jpg)
What Are Agent-basedModels?
Course Road Map
What AreAgent-basedModels?
Agent-basedFinancial Markets
Features of FinancialTime Series
Design Questions
A RepresentativeSimple Model
LeBaron CIGI/INET November 2012 – 6 / 38
![Page 12: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/12.jpg)
What are agent-based models?
LeBaron CIGI/INET November 2012 – 7 / 38
⊲ Individual, autonomous agents
![Page 13: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/13.jpg)
What are agent-based models?
LeBaron CIGI/INET November 2012 – 7 / 38
⊲ Individual, autonomous agents
⊲ Distributions matter
![Page 14: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/14.jpg)
What are agent-based models?
LeBaron CIGI/INET November 2012 – 7 / 38
⊲ Individual, autonomous agents
⊲ Distributions matter
⊲ Endogenous heterogeneity
![Page 15: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/15.jpg)
What are agent-based models?
LeBaron CIGI/INET November 2012 – 7 / 38
⊲ Individual, autonomous agents
⊲ Distributions matter
⊲ Endogenous heterogeneity
⊲ Computational?
![Page 16: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/16.jpg)
Where are they used?
LeBaron CIGI/INET November 2012 – 8 / 38
⊲ Economics
⊲ Finance
⊲ Marketing
![Page 17: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/17.jpg)
Where are they used?
LeBaron CIGI/INET November 2012 – 8 / 38
⊲ Economics
⊲ Finance
⊲ Marketing
⊲ Sociology
⊲ Political Science
⊲ Biology
![Page 18: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/18.jpg)
Where are they used?
LeBaron CIGI/INET November 2012 – 8 / 38
⊲ Economics
⊲ Finance
⊲ Marketing
⊲ Sociology
⊲ Political Science
⊲ Biology
⊲ Applications
•Public policy
•Business
•Military
![Page 19: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/19.jpg)
Simple model philosophy
LeBaron CIGI/INET November 2012 – 9 / 38
⊲ Axelrod (1984)
⊲ Epstein and Axtell (1997)
⊲ Miller and Page (2007)
⊲ Schelling (1978)
![Page 20: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/20.jpg)
Major resources in economics
LeBaron CIGI/INET November 2012 – 10 / 38
⊲ Handbook:Leigh Tesfatsion and Kenneth L. Judd, editors. Handbook ofComputational Economics: Agent-based computationaleconomics. North-Holland, Amsterdam, 2006
![Page 21: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/21.jpg)
Major resources in economics
LeBaron CIGI/INET November 2012 – 10 / 38
⊲ Handbook:Leigh Tesfatsion and Kenneth L. Judd, editors. Handbook ofComputational Economics: Agent-based computationaleconomics. North-Holland, Amsterdam, 2006
⊲ ACE website:http://www.econ.iastate.edu/tesfatsi/ace.htm
![Page 22: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/22.jpg)
Useful features for economic models
LeBaron CIGI/INET November 2012 – 11 / 38
⊲ Endogenous coordination
⊲ Small independent, individual shocks → large macroshocks
![Page 23: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/23.jpg)
Why simple finance models?
LeBaron CIGI/INET November 2012 – 12 / 38
⊲ Understand financial price dynamics
⊲ Simpler agent behavior
⊲ Connections to macro
![Page 24: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/24.jpg)
Why simple finance models?
LeBaron CIGI/INET November 2012 – 12 / 38
⊲ Understand financial price dynamics
⊲ Simpler agent behavior
⊲ Connections to macro
⊲ Modeling:Et(Pt+1) > Pt
![Page 25: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/25.jpg)
Agent-based FinancialMarkets
Course Road Map
What AreAgent-basedModels?
Agent-basedFinancial Markets
Features of FinancialTime Series
Design Questions
A RepresentativeSimple Model
LeBaron CIGI/INET November 2012 – 13 / 38
![Page 26: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/26.jpg)
Agent-based financial market goals
LeBaron CIGI/INET November 2012 – 14 / 38
1.Replicate interesting time series features
![Page 27: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/27.jpg)
Agent-based financial market goals
LeBaron CIGI/INET November 2012 – 14 / 38
1.Replicate interesting time series features
2.Understand adaptive behavior and market ecology
![Page 28: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/28.jpg)
Agent-based financial market goals
LeBaron CIGI/INET November 2012 – 14 / 38
1.Replicate interesting time series features
2.Understand adaptive behavior and market ecology
3.More realistic modeling platform
![Page 29: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/29.jpg)
Useful finance surveys
LeBaron CIGI/INET November 2012 – 15 / 38
⊲ Chiarella et al. (2009)Carl Chiarella, Roberto Dieci, and Xue-Zhong He. Heterogeneity, market mechanisms, and asset price dynamics. In T. Hens and
K. R. Schenk-Hoppe, editors, Handbook of Financial Markets: Dynamics and Evolution, pages 277–344. Elsevier, USA, 2009
⊲ Hommes and Wagener (2009)Cars H. Hommes and Florian Wagener. Complex evolutionary systems in behavioral finance. In Thorsten Hens and Klaus Reiner
Schenk-Hoppe, editors, Handbook of Financial Markets: Dynamics and Evolution, pages 217–276. North-Holland, 2009
⊲ LeBaron (2006)B. LeBaron. Agent-based computational finance. In Leigh Tesfatsion and Kenneth L. Judd, editors, Handbook of Computational
Economics, pages 1187–1233. Elsevier, 2006
⊲ Lux (2009)Thomas Lux. Stochastic behavioral asset pricing models and the stylized facts. In Thorsten Hens and Klaus Reiner
Schenk-Hoppe, editors, Handbook of Financial Markets: Dynamics and Evolution, pages 161–215. North-Holland, 2009
![Page 30: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/30.jpg)
Key features
LeBaron CIGI/INET November 2012 – 16 / 38
⊲ Interacting agents and/or strategies
⊲ Endogenous price time series
⊲ Endogenous heterogeneity
⊲ Self-contained learning:Learning → prices → learning → . . .
![Page 31: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/31.jpg)
Time series and populations
LeBaron CIGI/INET November 2012 – 17 / 38
Time series features Strategy populations
![Page 32: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/32.jpg)
Features of Financial TimeSeries
Course Road Map
What AreAgent-basedModels?
Agent-basedFinancial Markets
Features of FinancialTime Series
Design Questions
A RepresentativeSimple Model
LeBaron CIGI/INET November 2012 – 18 / 38
![Page 33: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/33.jpg)
Financial empirical summary
LeBaron CIGI/INET November 2012 – 19 / 38
⊲ Short term
•Uncorrelated returns
•Volatility persistence
•Leptokurtic (fat tailed) return distributions
![Page 34: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/34.jpg)
Financial empirical summary
LeBaron CIGI/INET November 2012 – 19 / 38
⊲ Short term
•Uncorrelated returns
•Volatility persistence
•Leptokurtic (fat tailed) return distributions
⊲ Long term
•Volatility persistence
•Return predictability
⋄Fundamental mean reversion
⋄Momentum (return persistence)
•Risk and return relationships
•Consumption and returns
![Page 35: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/35.jpg)
Design Questions
Course Road Map
What AreAgent-basedModels?
Agent-basedFinancial Markets
Features of FinancialTime Series
Design Questions
A RepresentativeSimple Model
LeBaron CIGI/INET November 2012 – 20 / 38
![Page 36: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/36.jpg)
Design questions
LeBaron CIGI/INET November 2012 – 21 / 38
⊲ Price determination
⊲ Learning and adaptation
⊲ Past data/learning gain
⊲ Information representations
⊲ Preferences
![Page 37: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/37.jpg)
Very short history of agent-based finance
LeBaron CIGI/INET November 2012 – 22 / 38
⊲ Multi-agent (many/open)
•Computational learning algorithms
• Interesting and rich evolutionary dynamics
•Difficult to analyze
![Page 38: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/38.jpg)
Very short history of agent-based finance
LeBaron CIGI/INET November 2012 – 22 / 38
⊲ Multi-agent (many/open)
•Computational learning algorithms
• Interesting and rich evolutionary dynamics
•Difficult to analyze
⊲ Simple (few agent models)
•Relatively easy to analyze
•Simpler dynamics
![Page 39: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/39.jpg)
Very short history of agent-based finance
LeBaron CIGI/INET November 2012 – 22 / 38
⊲ Multi-agent (many/open)
•Computational learning algorithms
• Interesting and rich evolutionary dynamics
•Difficult to analyze
⊲ Simple (few agent models)
•Relatively easy to analyze
•Simpler dynamics
⊲ Hybrid models (in between)
![Page 40: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/40.jpg)
Examples of many type
LeBaron CIGI/INET November 2012 – 23 / 38
⊲ Arthur et al. (1997)
⊲ Chen and Yeh (2002)
⊲ Tay and Linn (2001)
⊲ LeBaron (2001)
![Page 41: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/41.jpg)
Many (open) type philosophy
LeBaron CIGI/INET November 2012 – 24 / 38
⊲ Idealized features
•New strategies/types/firms appear to take advantageof environment
•Realistic
⊲ Problems
•How well can you build open ended systems?
•Need to put in some assumptions/structure
![Page 42: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/42.jpg)
Few type philosophy
LeBaron CIGI/INET November 2012 – 25 / 38
⊲ Small (sometimes 2) set of strategies
⊲ Often fixed parameters
⊲ Analytic results
⊲ Tractable dynamics
![Page 43: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/43.jpg)
Two types
LeBaron CIGI/INET November 2012 – 26 / 38
⊲ Trend following, adaptive expectations
Ei,t(Pt+1) = Pt + g(Pt − Pt−1) g > 0 (1)
![Page 44: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/44.jpg)
Two types
LeBaron CIGI/INET November 2012 – 26 / 38
⊲ Trend following, adaptive expectations
Ei,t(Pt+1) = Pt + g(Pt − Pt−1) g > 0 (1)
⊲ Fundamental/mean reverting
Ei,t(Pt+1) = Pf,t + ν(Pt − Pf,t) 0 ≤ ν ≤ 1 (2)Pf,t = Fundamental value (3)
![Page 45: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/45.jpg)
Two types
LeBaron CIGI/INET November 2012 – 26 / 38
⊲ Trend following, adaptive expectations
Ei,t(Pt+1) = Pt + g(Pt − Pt−1) g > 0 (1)
⊲ Fundamental/mean reverting
Ei,t(Pt+1) = Pf,t + ν(Pt − Pf,t) 0 ≤ ν ≤ 1 (2)Pf,t = Fundamental value (3)
⊲ Building block for interesting dynamics
![Page 46: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/46.jpg)
Two type models: Ancient history
LeBaron CIGI/INET November 2012 – 27 / 38
⊲ Zeeman (1974)Catastrophe theory
⊲ Frankel and Froot (1988)U.S. dollar behavior in the 80’s
⊲ Kirman (1991)Ants and contagion
![Page 47: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/47.jpg)
Few type models: Core approaches
LeBaron CIGI/INET November 2012 – 28 / 38
⊲ Brock and Hommes (1998)
⊲ Chiarella and He (2001)
⊲ Day and Huang (1990)
⊲ De Grauwe and Grimaldi (2006)
⊲ Farmer and Joshi (2002)
⊲ Levy et al. (1994)
⊲ Lux and Marchesi (1999)
⊲ Westerhoff and Reitz (2003)
![Page 48: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/48.jpg)
A Representative SimpleModel
Course Road Map
What AreAgent-basedModels?
Agent-basedFinancial Markets
Features of FinancialTime Series
Design Questions
A RepresentativeSimple Model
LeBaron CIGI/INET November 2012 – 29 / 38
![Page 49: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/49.jpg)
Quick model structure
LeBaron CIGI/INET November 2012 – 30 / 38
Gaunersdorfer and Hommes (2007)
⊲ Trend following traders
⊲ Fundamental traders
⊲ Market clearing
⊲ Adaptive populations
====Andrea Gaunersdorfer and Cars Hommes. A nonlinear structural model for
volatility clustering. In A. Kirman and G. Teyssiere, editors, Micro Economic
Models for Long Memory in Economics, pages 265–288. Springer-Verlag, 2007
![Page 50: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/50.jpg)
Quick model structure
LeBaron CIGI/INET November 2012 – 31 / 38
EF (Pt+1) = P ∗ + ν(Pt − P ∗) 0 ≤ ν ≤ 1
ET (Pt+1) = Pt + g(Pt − Pt−1) g > 0
Pt+1 =1
1 + r((1− nt)E
F (Pt+1) + ntET (Pt+1)) + y
![Page 51: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/51.jpg)
Quick model structure
LeBaron CIGI/INET November 2012 – 31 / 38
EF (Pt+1) = P ∗ + ν(Pt − P ∗) 0 ≤ ν ≤ 1
ET (Pt+1) = Pt + g(Pt − Pt−1) g > 0
Pt+1 =1
1 + r((1− nt)E
F (Pt+1) + ntET (Pt+1)) + y
zTt =ET (Pt+1) + y − (1 + r)Pt
γσ2
zFt =EF (Pt+1) + y − (1 + r)Pt
γσ2
![Page 52: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/52.jpg)
Quick model structure
LeBaron CIGI/INET November 2012 – 32 / 38
Rt = Pt + yt − (1 + r)Pt−1 yt = y + δt
uTt = RtzRt−1 + ηuTt−1
uFt = RtzFt−1 + ηuFt−1
![Page 53: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/53.jpg)
Quick model structure
LeBaron CIGI/INET November 2012 – 32 / 38
Rt = Pt + yt − (1 + r)Pt−1 yt = y + δt
uTt = RtzRt−1 + ηuTt−1
uFt = RtzFt−1 + ηuFt−1
nt =eβu
T
t
eβuTt + eβu
Ft
nt = nte−(Pt−P ∗)2/α
![Page 54: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/54.jpg)
Prices and returns in GH (no noise)
LeBaron CIGI/INET November 2012 – 33 / 38
0 200 400 600 800 1000 1200 1400 1600 1800 2000900
950
1000
1050
1100P
rice
0 200 400 600 800 1000 1200 1400 1600 1800 20000
0.2
0.4
0.6
0.8
1
Tre
nd fo
llow
ers(
frac
tion)
![Page 55: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/55.jpg)
Adding noise to pricing
LeBaron CIGI/INET November 2012 – 34 / 38
EF (Pt+1) = P ∗ + ν(Pt − P ∗) 0 ≤ ν ≤ 1
ET (Pt+1) = Pt + g(Pt − Pt−1) g > 0
Pt+1 =1
1 + r((1− nt)E
F (Pt+1) + ntET (Pt+1)) + y + ǫt+1
![Page 56: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/56.jpg)
Prices and returns in GH (noise)
LeBaron CIGI/INET November 2012 – 35 / 38
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 100000
500
1000
1500
2000P
rice
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000−0.1
−0.05
0
0.05
0.1
Ret
urn
![Page 57: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/57.jpg)
Prices and trend fractions (nt) in GH (noise)
LeBaron CIGI/INET November 2012 – 36 / 38
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 100000
500
1000
1500P
rice
0 1000 2000 3000 4000 5000 6000 7000 8000 9000 100000
0.2
0.4
0.6
0.8
1
Tre
nd fo
llow
ers(
frac
tion)
![Page 58: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/58.jpg)
Few type summary
LeBaron CIGI/INET November 2012 – 37 / 38
⊲ Can get basic price dynamics
⊲ Two strategies as core dynamic
⊲ Other models similar
⊲ Requires noise for realistic prices
⊲ Generates large, erratic swings in strategy fractions
![Page 59: Exploring Financial Instability Through Agent-based Modeling … · 2019-12-14 · Useful finance surveys LeBaron CIGI/INET November 2012 – 15 / 38 ⊲ Chiarella et al. (2009)](https://reader033.vdocuments.net/reader033/viewer/2022060415/5f137fbcd4345f178758c744/html5/thumbnails/59.jpg)
Overview: Part 1
LeBaron CIGI/INET November 2012 – 38 / 38
Course Road Map
What Are Agent-based Models?
Agent-based Financial Markets
Features of Financial Time Series
Design Questions
A Representative Simple Model