The minimal model of financial complexity
Authored by Philip Z. Maymin
Date Published: 2011
DOI: 10.1080/14697681003709447
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Abstract
A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.
Tags
Cellular automata
Agent based modelling
Dynamical systems
Behavioural finance
Chaos theory
Artificial economy
Complexity in finance
Dynamic models