The minimal model of financial complexity

A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possi...

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Bibliographic Details
Published in:Quantitative finance 2011-09, Vol.11 (9), p.1371-1378
Main Author: Maymin, Philip Z.
Format: Article
Language:English
Subjects:
Agent based modelling
Artificial economy
Behavioural finance
Cellular automata
Chaos theory
Complexity in finance
Dynamic models
Dynamical systems
Investment policy
Random walk theory
Stock prices
Studies
Time series
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Summary:A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.
ISSN:1469-7688
1469-7696
DOI:10.1080/14697681003709447