Abstract
We propose a new herd mechanism and embed it into an open financial market system, which allows traders to get in and out of the system based on some transition rates. Moreover, the novel mechanism can avoid the volatility disappearance when the population scale increases. There are three kinds of heterogeneous agents in the system: optimistic, pessimistic and fundamental. Interactions especially occur among three different groups of agents instead of two, which makes the artificial financial market more close to the real one. By the simulation results of this complex system, we can explain stylized facts like volatility clustering and find the key parameters of market bubbles and market collapses.
Highlights
The Interacting Agent Hypothesis (IAH) was proposed to explore the mechanism which leads to abnormal market fluctuations in financial markets
The insights are the following: (i) We successfully explained the relation between system size and fluctuation of financial market
Through three improvements, we solved the puzzle that the loss of volatility depends on growing system size
Summary
Large numbers of traders interact in financial markets, which creates a complex system of different agents’ interdependent interaction patterns. Entropy 2015, 17 and more researchers have grappled with the modeling of financial markets for the last few decades. Traditional modeling approaches based on the Efficient Market Hypothesis (EMH). Cannot explain some empirical stylized facts, like fat tails of returns and volatility clusters. The Interacting Agent Hypothesis (IAH) was proposed to explore the mechanism which leads to abnormal market fluctuations in financial markets. It mainly concerns two opinions different from
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