Evolutionary Frequency and Forecasting Accuracy: Simulations Based on an Agent-Based Artificial Stock Market

Abstract

Learning how to forecast is always important for traders, and divergent learning frequencies prevail among traders. The influence of the evolutionary frequency on learning performance has occasioned many studies of agent-based computational finance (e.g., Lettau in J Econ Dyn Control 21:1117–1147, 1997. doi: 10.1016/S0165-1889(97)00046-8 ; Szpiro in Complexity 2(4):31–39, 1997. doi: 10.1002/(SICI)1099-0526(199703/04)2:4 3.0.CO;2-3 ; Cacho and Simmons in Aust J Agric Resour Econ 43(3):305–322, 1999. doi: 10.1111/1467-8489.00081 ). Although these studies all suggest that evolving less frequently and, hence, experiencing more realizations help learning, this implication may result from their common stationary assumption. Therefore, we first attempt to approach this issue in a ‘dynamically’ evolving market in which agents learn to forecast endogenously generated asset prices. Moreover, in these studies’ market settings, evolving less frequently also meant having a longer time horizon. However, it is not true in many market settings that are even closer to the real financial markets. The clarification that the evolutionary frequency and the time horizon are two separate notions leaves the effect of the evolutionary frequency on learning even more elusive and worthy of exploration independently. We find that the influence of a trader’s evolutionary frequency on his forecasting accuracy depends on all market participants and the resulting price dynamics. In addition, prior studies also commonly assume that traders have identical preferences, which is too strong an assumption to apply to a real market. Considering the heterogeneity of preferences, we find that converging to the rational expectations equilibrium is hardly possible, and we even suggest that agents in a slow-learning market learn frequently. We also apply a series of econometric tests to explain the simulation results.