Speculative bubbles and fat tail phenomena in a heterogeneous agent model

TL;DR

This paper introduces a heterogeneous agent model of stock markets that explains endogenous price fluctuations, including speculative bubbles and fat-tailed return distributions, driven by trader strategy heterogeneity.

Contribution

It presents a novel heterogeneous agent model that reproduces complex market phenomena like bubbles and fat tails without external shocks.

Findings

Non-stationary chaos and bubbles arise from trader heterogeneity

Return distributions exhibit fat tails consistent with real markets

Model captures endogenous market dynamics

Abstract

The aim of this paper is to propose a heterogeneous agent model of stock markets that develop complicated endogenous price fluctuations. We find occurrences of non-stationary chaos, or speculative bubble, are caused by the heterogeneity of traders' strategies. Furthermore, we show that the distributions of returns generated from the heterogeneous agent model have fat tails, a remarkable stylized fact observed in almost all financial markets.