Complexity in Financial Markets: Modeling Psychological Behavior in Agent-Based Models and Order Book Models

222 Pages·2014·7.46 MB·English

by  Matthieu Cristelli (auth.)

Springer Theses
Recognizing Outstanding Ph.D. Research
Matthieu Cristelli
Complexity in
Financial Markets
Modeling Psychological
Behavior in Agent-Based
Models and Order Book Models
Springer Theses
Recognizing Outstanding Ph.D. Research
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Matthieu Cristelli
Complexity in Financial
Markets
Modeling Psychological Behavior
in Agent-Based Models and Order
Book Models
Doctoral Thesis accepted by
the Sapienza University of Rome, Italy
123
Author Supervisor
Dr. Matthieu Cristelli Prof.LucianoPietronero
Department of Physics ISC-CNR
ISC-CNR IstitutodeiSistemi Complessi
IstitutodeiSistemi Complessi Rome
Sapienza Universityof Rome Italy
Rome
Italy
ISSN 2190-5053 ISSN 2190-5061 (electronic)
ISBN 978-3-319-00722-9 ISBN 978-3-319-00723-6 (eBook)
DOI 10.1007/978-3-319-00723-6
SpringerChamHeidelbergNewYorkDordrechtLondon
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(cid:2)SpringerInternationalPublishingSwitzerland2014
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Supervisor’s Foreword
The increasing complexity and interconnectedness of world economies and
financial markets call for a radical paradigm change in the actual economic
thinking. The 2007 financial crisis, the following economic stagnancy, and the
verysloweconomicrecoveryofwesterncountrieshaveshownalltheweaknesses
of standard economic theories and standard economic policies.
Theprogressofeconomicdisciplineshasnowreachedaturningpointandnew
non-orthodox paths are emerging in opposition to mainstream approaches. A key
pointofthisnewvisionisthatitcannotbeanymoreneglectedthateconomiesare
complex systems and, given the present level of interconnectedness, economies
and markets must be described at a global level.
Any new approach aiming at an effective description and comprehension of
economic systems must include these features. In this perspective, physicists and
ingeneralinterdisciplinaryapproachescancontributetothisparadigmchangeina
twofold way.
On one hand, economics must really incorporate the fact that economy is a
complex system in an effective way and conceptual frameworks from Complex
Systems Theory in Physics can give new insights into complexity-oriented
descriptions of economic systems.
On the other hand, Economics must be turned into a much more experimental
anddata-orienteddiscipline.Data-drivenmethodsandtoolsmustbedevelopedto
properly address the nowadays economic complexity and concepts like interna-
tional externalities. The several economic theories introduced over the years are
now consideredasglobalparadigmswhich competeagainsteach other,aiming at
beinguniversalrecipesforallsituationsandregimesofpresenteconomicsystems.
Economics must instead point to a scenario in which the various theories have
different degrees of effectiveness depending on the economic regime under
consideration as it happens in Physics.
vii
viii Supervisor’sForeword
The ambitious goal of this thesis was to introduce new quantitative measures
(i.e.metrics)toturneconomicsystemdescriptionfromqualitativetoquantitative.
Financial markets are a natural starting point for a scientific approach to this
discipline since the large amount and availability of high-frequency records of
stock exchanges. On this account, agent-based models have shown the weakness
of standard theories offinancial markets in terms of representative and homoge-
neous agents and rational expectation and qualitatively shown the importance of
concepts such as heterogeneity, herding, and nonlinear feedbacks in order to
address the complex dynamics and features offinancial markets. However, these
kindsofmodelsareusuallyasblackboxeswhereitisalmostimpossibletoanswer
the question what gives what. Matthieu has participated in the development of a
minimal and workable agent-based model which demonstrated that the statistical
features of markets (i.e. Stylized Facts) are a finite size effects in this class of
models and correspond to the regime toward which markets self-organize. Self-
organization offinancial markets is often neglected by the literature in this field
evenifitisakeypointtounderstandthestabilityofmarkets.Agent-basedmodels,
however, represent only a conceptual and qualitative metaphor which cannot, at
thepresentstage,beturnedintoconcretetoolsormetricsforeconomicregulatory
policy, systemic riskestimates, etc. Inthisthesis apossiblepath inorder tomake
agent-based models effective tools for the description of financial markets is
indicated and discussed in terms of effective number of agents.
The second issue addressed in this thesis is the challenge of measuring the
competitiveness of countries and the complexity of products starting from an
export flow dataset. Although economics is far from being a good candidate for
experimental approach given a systematic lack of reliable data, a recent strand of
data-driven literature has proposed a complexity approach to international trade
highlighting the fact that relatively rich countries are also characterized by high
diversificationoftheirexportbasketincontrasttostandardRicardianargumentsin
terms of competitive advantage leading to specialization of productive systems.
Thechallengeisthereforeassessingquantitativelyadvantageofdiversificationfor
thepotentialofdevelopmentandgrowthofcountries.Matthieuhasbeenoneofthe
main actors in the development of a novel statistical approach based on coupled
nonlinear maps, whose fixed point defines new non-income based metrics for the
countryfitnessandproductcomplexity.Thisworkappearstobegroundbreakingin
many directions and aspects. As an example, through this new competitiveness
metrics it is possible to compare non-income based factors of fitness and com-
plexitytoincomemeasures,forinstance,countries’GDPspercapita.Preliminary
resultsrevealthatthedifferencebetweenthetwosourcesofinformationiscrucial
for quantitatively assessing the hidden potential of growth of countries. In addi-
tion, the analysis of the dynamics of countries’ trajectories in the Fitness-Income
plane shows the existence of several regimes of economic growth calling for a
description in terms of a heterogeneous dynamics of the economic complexity.
Supervisor’sForeword ix
In summary, Matthieu carried out frontier and, in my opinion, groundbreaking
researches in the perspective of the paradigm change needed in the present
economic thinking. The development of quantitative tools and metrics of
Matthieu’s research activity points exactly in this direction and represents a
fundamental contribution to economic theory.
Rome, April 2013 Prof. Luciano Pietronero
Acknowledgments
IwouldliketothankProf.Pietronero,mytutorduringmyMaster’sDegreeandmy
Ph.D. activity, for the countless conversations about Science during which I have
learnt the enthusiasm for the search for Nature’s answer.
I thank all the members of the PIL group for all the suggestions received.
Ithankallmycolleagues(and,aboveall,friendsbeforebeingcolleagues)ofthe
Ph.D. program delocalized among the New and Old Building of the Physics
Department.
Among these friends, there is a special Amica (i.e. special friend in italian…)
who I would like to thank for about 2900? days of ordinary madness.
All the people who stayed in Room 206 and made my Ph.D. unforgettable
deserve special thanks.
The Room 206 also deserves nostalgic thanks: this room is full of personal
memories,someunforgettable,somepleasant,someothersfrustratingandsad,but
all equally important.
I acknowledge the Italian PNR project CRISIS-Lab and FET Open project nr.
255987 FOC (Forecasting Financial Crisis) for the support given to my work.
Lastbutnotleast,Iwouldliketothankmyfamilywhichsupportedandputup
me (in Italian this phrase sounds like a wordplay since supported is translated by
supportare while put up by sopportare).
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