Minimal Agent Based Model For The Origin And Self-Organization Of Stylized Facts In Financial Markets

TL;DR

This paper presents a minimal agent-based model explaining the origin of stylized facts like fat tails and volatility clustering in financial markets, emphasizing self-organization towards a quasi-critical state driven by agent interactions.

Contribution

It introduces a simple agent-based framework with fundamentalists and chartists, revealing mechanisms behind market stylized facts and self-organization processes.

Findings

Fat tails and volatility clustering arise from finite size effects.

Self-organization towards a quasi-critical state is triggered by agent action thresholds.

Stylized facts are active at different time scales, indicating non-universality.

Abstract

We introduce a minimal Agent Based Model with two classes of agents, fundamentalists (stabilizing) and chartists (destabilizing) and we focus on the essential features which can generate the stylized facts. This leads to a detailed understanding of the origin of fat tails and volatility clustering and we propose a mechanism for the self-organization of the market dynamics in the quasi-critical state. The stylized facts are shown to correspond to finite size effects which, however, can be active at different time scales. This implies that universality cannot be expected in describing these properties in terms of effective critical exponents. The introduction of a threshold in the agents' action (small price fluctuations lead to no-action) triggers the self-organization towards the quasi-critical state. Non-stationarity in the number of active agents and in their action plays a fundamental role. The model can be easily generalized to more realistic variants in a systematic way.