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14 April 2021
  » arxiv » cond-mat/9908069

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Transmission of Information and Herd Behavior: an Application to Financial Markets
Victor M. Eguiluz ; Martin G. Zimmermann ;
Rating Members: 3.41/5 (1 reader) | Visitors: 4/5 (1 visitor)
Date 4 Aug 1999
Journal Phys. Rev. Lett. 85, 5659-5662 (2000)
Subject Condensed Matter; Adaptation and Self-Organizing Systems | cond-mat nlin.AO
AffiliationIMEDEA, Palma de Mallorca, Spain
AbstractWe propose a model for stochastic formation of opinion clusters, modelled by an evolving network, and herd behaviour to account for the observed fat-tail distribution in returns of financial-price data. The only parameter of the model is h, the rate of information dispersion per trade, which is a measure of herding behavior. For h below a critical h* the system displays a power-law distribution of the returns with exponential cut-off. However for h>h* an increase in the probability of large returns is found, and may be associated to the occurrence of large crashes.
Source arXiv, cond-mat/9908069
Other source [GID 103127] pmid11136071
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1 review found:
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1. review 05090022 (1 reader)    * Rate this comment.
Review title: Origin of the fat tail
Reviewer: reviewer22
Date: 26 September 2005 at 21:43 GMT.
Comment: The authors introduce the dynamical version of the Cont and Bouchaud model. This model simulates how agents follow the same information when belonging to the same cluster. Agents that share common information take all the same decision in one step. Because of the clustering, the resulting price market is very fluctuating. Indeed, large cluster cause large fluctuations and so large tails in the distribution of returns.

The fat tail distribution of returns in finance can therefore be explained by these informations clusters where all agents are herding. However, on the point of view of game theory, this simple model cannot explain the reason why it is more profitable to herd than not to herd. Is the profit higher when people are herding? Does herding in financial markets corresponds to the Nash equilibrium?
All these questions remain... One should expect that fat tail distributions are the results of collective behaviour. It is therefore not surprising that this model, which includes large clusters of agents, induce this kind of distribution.

I would avdise to play with this model because of its simplicity. It can be a starting point for a more elaborate model of financial markets.

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