Properties of the wealth process in a market microstructure model

In this short paper we define the wealth process in a spin model for market microstructure, for individual agents and in aggregate. The agents in our model try to balance their desire to belong to the local majority (herding behavior), defined over random network neighborhoods, and the occasional ad...

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Bibliographic Details
Published in:Physica A 2007-05, Vol.378 (2), p.443-452
Main Authors: Theodosopoulos, Ted, Yuen, Ming
Format: Article
Language:English
Subjects:
Martingale characterization
Spin market model
Strategic stability
Wealth process
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Summary:In this short paper we define the wealth process in a spin model for market microstructure, for individual agents and in aggregate. The agents in our model try to balance their desire to belong to the local majority (herding behavior), defined over random network neighborhoods, and the occasional advantage of belonging to the global minority (contrarian trading). We arrive at a classification of the martingale properties of this wealth process and use it to determine the strategic stability of the agents’ interactions. Our goal is to add a behavioral interpretation to this stochastic agent-based model for market fluctuations.
ISSN:0378-4371
1873-2119
DOI:10.1016/j.physa.2006.12.030