Modelling Financial Markets by Self-Organized Criticality

TL;DR

This paper introduces a financial market model based on self-organized criticality, capturing realistic price dynamics and stylized facts through heterogeneous traders and information spreading, with insights on market stability and policy strategies.

Contribution

It develops a novel self-organized criticality-based model incorporating heterogeneous traders and information contagion, highlighting the impact of random traders and information reduction on market stability.

Findings

Model reproduces stylized facts of financial markets.

Random traders can stabilize market fluctuations.

Reducing information dissemination can dampen market volatility.

Abstract

We present a financial market model, characterized by self-organized criticality, that is able to generate endogenously a realistic price dynamics and to reproduce well-known stylized facts. We consider a community of heterogeneous traders, composed by chartists and fundamentalists, and focus on the role of informative pressure on market participants, showing how the spreading of information, based on a realistic imitative behavior, drives contagion and causes market fragility. In this model imitation is not intended as a change in the agent's group of origin, but is referred only to the price formation process. We introduce in the community also a variable number of random traders in order to study their possible beneficial role in stabilizing the market, as found in other studies. Finally we also suggest some counterintuitive policy strategies able to dampen fluctuations by means of a partial reduction of information.