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Agent-based model with multi-level herding for complex financial systems.

ABSTRACT: In complex financial systems, the sector structure and volatility clustering are respectively important features of the spatial and temporal correlations. However, the microscopic generation mechanism of the sector structure is not yet understood. Especially, how to produce these two features in one model remains challenging. We introduce a novel interaction mechanism, i.e., the multi-level herding, in constructing an agent-based model to investigate the sector structure combined with volatility clustering. According to the previous market performance, agents trade in groups, and their herding behavior comprises the herding at stock, sector and market levels. Further, we propose methods to determine the key model parameters from historical market data, rather than from statistical fitting of the results. From the simulation, we obtain the sector structure and volatility clustering, as well as the eigenvalue distribution of the cross-correlation matrix, for the New York and Hong Kong stock exchanges. These properties are in agreement with the empirical ones. Our results quantitatively reveal that the multi-level herding is the microscopic generation mechanism of the sector structure, and provide new insight into the spatio-temporal interactions in financial systems at the microscopic level.

SUBMITTER: Chen JJ

PROVIDER: S-EPMC4323661 | biostudies-literature | 2015 Feb

REPOSITORIES: biostudies-literature

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Agent-based model with multi-level herding for complex financial systems.

Chen Jun-Jie JJ Tan Lei L Zheng Bo B

Scientific reports 20150211

In complex financial systems, the sector structure and volatility clustering are respectively important features of the spatial and temporal correlations. However, the microscopic generation mechanism of the sector structure is not yet understood. Especially, how to produce these two features in one model remains challenging. We introduce a novel interaction mechanism, i.e., the multi-level herding, in constructing an agent-based model to investigate the sector structure combined with volatility ...[more]

PMID: 25669427

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Project description:BackgroundFor complex financial systems, the negative and positive return-volatility correlations, i.e., the so-called leverage and anti-leverage effects, are particularly important for the understanding of the price dynamics. However, the microscopic origination of the leverage and anti-leverage effects is still not understood, and how to produce these effects in agent-based modeling remains open. On the other hand, in constructing microscopic models, it is a promising conception to determine model parameters from empirical data rather than from statistical fitting of the results.MethodsTo study the microscopic origination of the return-volatility correlation in financial systems, we take into account the individual and collective behaviors of investors in real markets, and construct an agent-based model. The agents are linked with each other and trade in groups, and particularly, two novel microscopic mechanisms, i.e., investors' asymmetric trading and herding in bull and bear markets, are introduced. Further, we propose effective methods to determine the key parameters in our model from historical market data.ResultsWith the model parameters determined for six representative stock-market indices in the world, respectively, we obtain the corresponding leverage or anti-leverage effect from the simulation, and the effect is in agreement with the empirical one on amplitude and duration. At the same time, our model produces other features of the real markets, such as the fat-tail distribution of returns and the long-term correlation of volatilities.ConclusionsWe reveal that for the leverage and anti-leverage effects, both the investors' asymmetric trading and herding are essential generation mechanisms. Among the six markets, however, the investors' trading is approximately symmetric for the five markets which exhibit the leverage effect, thus contributing very little. These two microscopic mechanisms and the methods for the determination of the key parameters can be applied to other complex systems with similar asymmetries.

Project description:BackgroundProteins, individual cells, and cell populations denote different levels of an organizational hierarchy, each of which with its own dynamics. Multi-level modeling is concerned with describing a system at these different levels and relating their dynamics. Rule-based modeling has increasingly attracted attention due to enabling a concise and compact description of biochemical systems. In addition, it allows different methods for model analysis, since more than one semantics can be defined for the same syntax.ResultsMulti-level modeling implies the hierarchical nesting of model entities and explicit support for downward and upward causation between different levels. Concepts to support multi-level modeling in a rule-based language are identified. To those belong rule schemata, hierarchical nesting of species, assigning attributes and solutions to species at each level and preserving content of nested species while applying rules. Further necessities are the ability to apply rules and flexibly define reaction rate kinetics and constraints on nested species as well as species that are nested within others. An example model is presented that analyses the interplay of an intracellular control circuit with states at cell level, its relation to cell division, and connections to intercellular communication within a population of cells. The example is described in ML-Rules - a rule-based multi-level approach that has been realized within the plug-in-based modeling and simulation framework JAMES II.ConclusionsRule-based languages are a suitable starting point for developing a concise and compact language for multi-level modeling of cell biological systems. The combination of nesting species, assigning attributes, and constraining reactions according to these attributes is crucial in achieving the desired expressiveness. Rule schemata allow a concise and compact description of complex models. As a result, the presented approach facilitates developing and maintaining multi-level models that, for instance, interrelate intracellular and intercellular dynamics.

Dataset Information

Agent-based model with multi-level herding for complex financial systems.

Publications

Agent-based model with multi-level herding for complex financial systems.

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