Introducing Social Investors into Multi-Agent Models of Financial Markets Stephen Chen, Brenda Spotton Visano, and Ying Kong York University


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Introducing Social Investors into Multi-Agent Models of Financial Markets

  • Stephen Chen, Brenda Spotton Visano, and Ying Kong York University


What is a Social Investor?

  • Trend Investors

  • Social Investors

    • Buy when others are buying


What is the Role of Social Investors?

  • What happens during a mania or market bubble?

    • “Irrational Exuberance”
  • Market bubbles tend to coincide with increases in market participation



Why use a Multi-Agent Model?

  • Capture the dynamics of the event

  • Model a larger number of actors and interactions

    • Mathematical intractability
  • Test intervention strategies



Existing Models of Financial Crises

  • Financial instability (Banking crises)

    • Game theory models of discrete time events – e.g. coordination failure
  • Market bubbles and crashes

    • Mostly qualitative analysis – e.g. socio-economic factors, new technology, new market mechanisms, etc


Existing Multi-Agent Models

  • Developed to model distributions of price changes  “fat tails”

  • Models have two investor types

    • Fundamental and Noise/Trend
  • Models focus on communication processes



Game Theory

  • Actors each have a choice, and the reward of each choice depends on the action of the other actor



Nash Equilibria

  • First actor makes a decision, second actor picks optimal decision based on first actor’s decision, first actor’s optimal decision is the original decision



Example of Nash Equilibrium

  • Actor 1 Cooperates

  • Actor 2 Defects

    • +5 benefit vs. +1
  • Actor 1 Defects

    • -5 benefit vs. -10
  • Actor 2 still Defects

    • Nash Equilibrium


Game Theory behind Multi-Agent Model

  • Two actors – Fundamental and Trend

    • Fundamental buying causes price to go up
    • Trend buying because price is going up
    • Fundamental selling because price is too high
    • Trend selling because price is going down


Game Theory behind Multi-Agent Model II

  • Two actors – Informed and Social

    • Informed buying causes prices to go up
    • Social buying because others are buying causes prices to keep going up
    • Informed keep buying because prices are going up


Model Results

  • Only two states – overly sinusoidal price trends



Current Results

  • Actors: Fundamental, Trend, and Social

  • No Nash equilibrium



Summary

  • Existing (theoretical) tools are not suitable for the modelling of all economic phenomena

  • Easy to model stable or unstable systems, but hard to model semi-stable systems



Future Work

  • Sensitivity testing – analysis of key factors between stable and unstable systems

  • Interventions strategies – attempts to ameliorate a market bubble in “real time”




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