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15 April 2021
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SCIENCE-ADVISOR - review - "Origin of the fat tail..." review 05090022 (1 reader)    * Rate this comment.
Article reference: Transmission of Information and Herd Behavior: an Application to Financial Markets.
Review title: Origin of the fat tail
Reviewer: reviewer22
Date: 26 September 2005 at 21:43 GMT.
Read this article?: very nice and simple model
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.

important: 3,    broad interest: 4,    readable: 3,    new: 3,    correct: 4,   Global: 3.5
Article rating: 3.41/5
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