Exact Solution of a Model for Crowding and Information Transmission in Financial Markets

TL;DR

This paper provides an exact analytical solution to a model of crowding and information sharing in financial markets, revealing heavy-tailed price variations and persistent high kurtosis across parameters.

Contribution

It introduces an exact solution to a crowding model in financial markets, highlighting the power law distribution of group sizes and its impact on price fluctuations.

Findings

Group size distribution follows a power law with exponential cutoff.

Price variation distribution exhibits heavy tails.

Kurtosis remains large for all parameters.

Abstract

An exact solution is presented to a model that mimics the crowding effect in financial markets which arises when groups of agents share information. We show that the size distribution of groups of agents has a power law tail with an exponential cut-off. As the size of these groups determines the supply and demand balance, this implies heavy tails in the distribution of price variation. The moments of the distribution are calculated, as well as the kurtosis. We find that the kurtosis is large for all model parameter values and that the model is not self-organizing.