Interplay between endogenous and exogenous fluctuations in financial markets

TL;DR

This paper investigates how endogenous agent interactions and exogenous noise sources jointly influence the long-range dependence and volatility patterns observed in financial markets, emphasizing the importance of including external fluctuations in models.

Contribution

It introduces a combined agent-based and stochastic model that incorporates exogenous noise, highlighting its essential role in replicating market volatility features.

Findings

Exogenous noise significantly impacts market volatility patterns.

The interplay explains long-range dependence in return intervals.

Models excluding exogenous factors may be incomplete.

Abstract

We address microscopic, agent based, and macroscopic, stochastic, modeling of the financial markets combining it with the exogenous noise. The interplay between the endogenous dynamics of agents and the exogenous noise is the primary mechanism responsible for the observed long-range dependence and statistical properties of high volatility return intervals. By exogenous noise we mean information flow or/and order flow fluctuations. Numerical results based on the proposed model reveal that the exogenous fluctuations have to be considered as indispensable part of comprehensive modeling of the financial markets.