Models of Financial Markets with Extensive Participation Incentives

Abstract

We consider models of financial markets in which all parties involved find incentives to participate. Strategies are evaluated directly by their virtual wealths. By tuning the price sensitivity and market impact, a phase diagram with several attractor behaviors resembling those of real markets emerge, reflecting the roles played by the arbitrageurs and trendsetters, and including a phase with irregular price trends and positive sums. The positive-sumness of the players' wealths provides participation incentives for them. Evolution and the bid-ask spread provide mechanisms for the gain in wealth of both the players and market-makers. New players survive in the market if the evolutionary rate is sufficiently slow. We test the applicability of the model on real Hang Seng Index data over 20 years. Comparisons with other models show that our model has a superior average performance when applied to real financial data.

arXiv comment17 pages, 16 figures

References in corpus (15)

• Emergence of Cooperation and Organization in an Evolutionary Game
• The statistical properties of the volatility of price fluctuations
• Statistical mechanics of systems with heterogeneous agents: Minority Games
• Toward a Theory of Marginally Efficient Markets
• Modeling Market Mechanism with Minority Game
• Phase Transition and Symmetry Breaking in the Minority Game
• Stylized facts of financial markets and market crashes in Minority Games
• Bubbles, crashes and intermittency in agent based market models
• From market games to real-world markets
• Exact solution of a modified El Farol's bar problem: Efficiency and the role of market impact
• The $-game
• Generating Functional Analysis of the Dynamics of the Batch Minority Game with Random External Information
• Capital flow in a two-component dynamical system
• Effects of Diversity on Multi-agent Systems: Minority Games
• Temporal Effects of Agent Aggregation in the Dynamics of Multiagent Systems

Cited by in corpus (6)

• Fractal Profit Landscape of the Stock Market
• Market behavior and performance of different strategy evaluation schemes
• Coupled effects of market impact and asymmetric sensitivity in financial markets
• Self-organization and phase transition in financial markets with multiple choices
• Self-reinforcing feedback loop in financial markets with coupling of market impact and momentum traders
• Effects of payoff functions and preference distributions in an adaptive population