Predator-Prey Model for Stock Market Fluctuations

TL;DR

This paper introduces a predator-prey inspired dynamical model for stock market fluctuations, capturing investor behavior and its impact on asset prices through oscillations and population dynamics.

Contribution

It develops a two-level model combining agent-based investor behavior with a price mechanism influenced by investor group populations, inspired by predator-prey dynamics.

Findings

Model exhibits large oscillations in investor groups, linked to market bullish and bearish phases.

Price dynamics depend on investor group populations, with different models for excess demand and liquidity.

Analysis compares outcomes of simple and complex pricing mechanisms.

Abstract

We present a dynamical model for the price evolution of financial assets. The model is based in a two level structure. In the first stage one finds an agent-based model that describes the present state of the investors' beliefs, perspectives or strategies. The dynamics is inspired by a model for describing predator-prey population evolution: agents change their mind through self- or mutual interaction, and the decision is adopted on a random basis, with no direct influence of the price itself. One of the most appealing properties of such a system is the presence of large oscillations in the number of agents sharing the same perspective, what may be linked with the existence of bullish and bearish periods in financial markets. In the second stage one has the pricing mechanism, which will be driven by the relative population in the different investors' groups. The price equation will depend on the specific nature of the species, and thus it may change from one market to the other: we will firstly present a simple model of excess demand, and subsequently consider a more elaborate liquidity model. The outcomes of both models are analysed and compared.