Models of Financial Markets with Extensive Participation Incentives

TL;DR

This paper introduces a comprehensive financial market model where all participants have incentives to engage, capturing complex behaviors like irregular trends and positive wealth sums, and demonstrates its effectiveness on real market data.

Contribution

The paper presents a novel market model with direct wealth-based strategy evaluation, revealing diverse attractor behaviors and outperforming existing models on real data.

Findings

Emergence of multiple market attractor behaviors

Model achieves positive-sum wealth dynamics

Outperforms other models on Hang Seng Index data

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.