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Modeling financial markets by self-organized criticality
Alessio Emanuele Biondo1, Alessandro Pluchino2, Andrea Rapisarda2
1Dipartimento di Economia e Impresa - Universitá di Catania, Corso Italia 55, 95129 Catania, Italy.
Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics
|November 14, 2015
Summary
This study introduces a financial market model with self-organized criticality, showing how information spread and imitation among traders create realistic price dynamics and market fragility. Reducing information can surprisingly stabilize markets.
Area of Science:
- * Quantitative Finance
- * Computational Economics
- * Complex Systems
Background:
- * Financial markets exhibit complex dynamics and stylized facts not fully explained by traditional models.
- * Understanding trader behavior, information diffusion, and their impact on market stability is crucial.
Purpose of the Study:
- * To develop a financial market model exhibiting self-organized criticality.
- * To investigate the role of information spread and imitative behavior in generating realistic price dynamics.
- * To assess the impact of random traders and propose policy interventions for market stabilization.
Main Methods:
- * Agent-based modeling of heterogeneous traders (chartists and fundamentalists).
- * Simulation of information diffusion and imitative behavior in price formation.
- * Inclusion of a variable number of random traders to analyze market stabilization effects.
Main Results:
- * The model successfully generates endogenous realistic price dynamics and reproduces stylized facts.
- * Information pressure and imitative behavior are shown to drive market contagion and fragility.
- * A variable number of random traders can contribute to market stabilization.
- * Partial reduction of information is identified as a counterintuitive policy for dampening fluctuations.
Conclusions:
- * Self-organized criticality provides a framework for understanding realistic financial market behavior.
- * Information dynamics and trader imitation are key drivers of market fragility.
- * Targeted information control can be an effective strategy for enhancing market stability.
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