Heterogeneity and feedback in an agent-based market model

Abstract

We propose an agent-based model of a single-asset financial market, described in terms of a small number of parameters, which generates price returns with statistical properties similar to the stylized facts observed in financial time series. Our agent-based model generically leads to the absence of autocorrelation in returns, self-sustaining excess volatility, mean-reverting volatility, volatility clustering and endogenous bursts of market activity non-attributable to external noise. The parsimonious structure of the model allows the identification of feedback and heterogeneity as the key mechanisms leading to these effects.

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