Markets, Herding and Response to External Information.
Adrián Carro1, Raúl Toral1, Maxi San Miguel1
1Instituto de Física Interdisciplinar y Sistemas Complejos (IFISC), CSIC-UIB, Palma de Mallorca, Spain.
Plos One
|July 24, 2015
Summary
External information, like rumors or public perception, significantly impacts financial markets. Our agent-based model reveals three market regimes: amplification, precise assimilation, and undervaluation of incoming information signals.
Area of Science:
- Financial markets
- Agent-based modeling
- Information economics
Background:
- Financial markets are influenced by diverse information sources.
- Herding behavior and external signals can impact trader decisions.
- Understanding information's role is crucial for market dynamics.
Purpose of the Study:
- To model the influence of external information on financial markets.
- To investigate how traders' herding behavior interacts with external signals.
- To identify market regimes based on information assimilation.
Main Methods:
- Development of a stochastic agent-based market model.
- Incorporation of a dynamic external information signal (e.g., German Economic Sentiment Indicator).
- Calibration using Germany's DAX index data.
Main Results:
- The model demonstrates how external signals act as exogenous shocks, influencing trading behavior.
- Market response to information is maximal at intermediate parameter values.
- Identification of three distinct market regimes: amplification, precise assimilation, and undervaluation.
Conclusions:
- External information significantly shapes financial market behavior.
- Market parameter values determine the degree of information assimilation.
- The study provides insights into market efficiency and information processing.
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