Realistic Simulation of Financial Markets: Analyzing Market Behaviors by the Third Mode of Science

205 Pages·2016·7.45 MB·English

by  hajime Kita

Evolutionary Economics and Social Complexity Science 4
Hajime Kita
Kazuhisa Taniguchi
Yoshihiro Nakajima E ditors
Realistic
Simulation
of Financial
Markets
Analyzing Market Behaviors by the Third
Mode of Science
Evolutionary Economics and Social Complexity
Science
Volume 4
Editors-in-Chief
TakahiroFujimoto,Tokyo,Japan
YujiAruka,Tokyo,Japan
EditorialBoard
SatoshiSechiyama,Kyoto,Japan
YoshinoriShiozawa,Osaka,Japan
KiichiroYagi,Neyagawa,Japan
KazuoYoshida,Kyoto,Japan
HideakiAoyama,Kyoto,Japan
HiroshiDeguchi,Yokohama,Japan
MakotoNishibe,Sapporo,Japan
TakashiHashimoto,Nomi,Japan
MasaakiYoshida,Kawasaki,Japan
TamotsuOnozaki,Tokyo,Japan
Shu-HengChen,Taipei,Taiwan
DirkHelbing,Zurich,Switzerland
TheJapaneseAssociationforEvolutionaryEconomics(JAFEE)alwayshasadhered
to its originalaim of taking an explicit“integrated” approach.This path has been
followed steadfastly since the Association’s establishment in 1997 and, as well,
since the inauguration of our international journal in 2004. We have deployed an
agendaencompassingacontemporaryarrayofsubjectsincludingbutnotlimitedto:
foundations of institutional and evolutionary economics, criticism of mainstream
viewsinthesocialsciences,knowledgeandlearninginsocio-economiclife,devel-
opmentand innovationof technologies,transformationof industrial organizations
and economic systems, experimentalstudies in economics, agent-based modeling
ofsocio-economicsystems,evolutionofthegovernancestructureoffirmsandother
organizations,comparison of dynamically changing institutions of the world, and
policy proposals in the transformational process of economic life. In short, our
starting point is an “integrative science” of evolutionary and institutional views.
Furthermore,wealwaysendeavortostayabreastofnewlyestablishedmethodssuch
asagent-basedmodeling,socio/econo-physics,andnetworkanalysisaspartofour
integrativelinks.
More fundamentally, “evolution” in social science is interpreted as an
essential key word, i.e., an integrative and /or communicative link to understand
and re-domain various preceding dichotomies in the sciences: ontological or
epistemological,subjectiveorobjective,homogeneousorheterogeneous,naturalor
artificial, selfish or altruistic, individualistic or collective, rational or irrational,
axiomatic or psychological-based, causal nexus or cyclic networked, optimal
or adaptive, micro-or macroscopic, deterministic or stochastic, historical or
theoretical, mathematical or computational, experimental or empirical, agent-
based or socio/econo-physical, institutional or evolutionary, regional or global,
andso on.Theconventionalmeaningsadheringto varioustraditionaldichotomies
may be more or less obsolete, to be replaced with more current ones vis-à-vis
contemporaryacademictrends.Thuswearestronglyencouragedtointegratesome
oftheconventionaldichotomies.
These attempts are not limited to the field of economic sciences, including
management sciences, but also include social science in general. In that way,
understandingthesocialprofilesofcomplexsciencemaythenbewithinourreach.
Inthemeantime,contemporarysocietyappearstobeevolvingintoanewlyemerg-
ingphase,chieflycharacterizedbyaninformationandcommunicationtechnology
(ICT) mode of production and a service network system replacing the earlier
establishedfactorysystemwithanewonethatissuitedtoactualobservations.Inthe
faceofthesechangesweareurgentlycompelledtoexploreasetofnewproperties
for a new socio/economic system by implementing new ideas. We thus are keen
to look for “integrated principles” common to the above-mentioned dichotomies
throughoutourserialcompilationofpublications.Wearealsoencouragedtocreate
anew,broaderspectrumforestablishingaspecificmethodpositivelyintegratedin
ourownoriginalway.
Moreinformationaboutthisseriesathttp://www.springer.com/series/11930
Hajime Kita (cid:129) Kazuhisa Taniguchi (cid:129)
Yoshihiro Nakajima
Editors
Realistic Simulation
of Financial Markets
Analyzing Market Behaviors by the Third
Mode of Science
123
Editors
HajimeKita KazuhisaTaniguchi
InstituteforLiberalArtsandSciences FacultyofEconomics
KyotoUniversity KindaiUniversity
Kyoto,Japan Osaka,Japan
YoshihiroNakajima
GraduateSchoolofEconomics
OsakaCityUniversity
Osaka,Japan
ISSN2198-4204 ISSN2198-4212 (electronic)
EvolutionaryEconomicsandSocialComplexityScience
ISBN978-4-431-55056-3 ISBN978-4-431-55057-0 (eBook)
DOI10.1007/978-4-431-55057-0
LibraryofCongressControlNumber:2016941615
©SpringerJapan2016
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thematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations,recitation,
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nowknownorhereafterdeveloped.
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Foreword
Everyday human life, on a mass global scale, is ushering in the era of a new
modeofinteractioncalledsocialinformationandcommunicationtechnology(ICT).
Our lives are rapidly becoming integrated with artificial intelligence in various
spheres of our socioeconomic systems. In many fields, both civilian and military,
humancontributionstodecision-makingareattimesbeingreplacedbyalgorithm-
based agents. Algorithms not only coexist with humans, but are also becoming
increasinglypreferredto human-madedecisions. Thismovealso naturallyapplies
to markets. As sophisticated high-frequency trading (HFT) demonstrates, the
computing power of algorithms in financial exchanges overwhelmingly triumphs
over human ability and instinct; thus, understanding of the market system is no
longer grounded in human-initiated transactions. There is keen anticipation of a
simulation system compatible both with people and algorithms to clarify how the
marketcanworkthroughheterogeneousinteractionbetweenthetwoparties.
TheU-MartProjectforanartificial-intelligence-basedmarket,addressedinthis
book,isacompellingchallengeforgraspingthisnewapproachandsatisfyingHFT’s
many requirements. This project, begun at the end of the twentieth century, was
in fact far-sighted with regard to the advent of HTF and was continually updated
intensively and extensively to keep pace with the Tokyo Stock Exchange’s new
features.Thisbook’sgroupofauthorshaspublishedseveralbooksonU-Mart,both
inJapaneseandEnglish.ThefirstEnglish-languagebookwaspublishedbySpringer
in2008.ThisbookmarksthesecondEnglishreleaseonthetopicofU-Mart.Ihope
thereaderswillenjoylookinginonanewformofrealisticsimulationandexamining
itsimplicationstowardanewtypeofmodernexchange.
Tokyo,Japan YujiAruka
January2015
v

Preface
Thisbookreportsona studyaboutrealistic simulationoffinancialmarkets,based
especially on the core study which is the U-Mart Project. In 1998, one of the
authors of this book, Professor Kita along with other authors invited one of the
authors, Professor Shiozawa, to give a discourse at the 4th Emergence Systems
SymposiumundertheauspicesoftheSocietyofInstrumentandControlEngineers.
This actually led the birth of the U-Mart Project. In 1999, major members of the
U-MartProjectweredeterminedandthestudywaskickedoff.Intheautumnofthe
sameyear,thespecificationsoftheartificialfuturesmarketwerealmostdetermined
in order to achieve the aim of U-Mart Project. The building of the entire system
wasthenstarted.Theprototypewascompletedin2000,whiledemonstrationswere
presentedat the Japan Association forEvolutionaryEconomicsand ourfirst open
experimentwasalsoconductedaroundthistime.Afterward,openexperimentshave
beenconductedeveryyear.Lastyearmarkedthe14thopenexperimentconducted.
At the same time, international open experiments have also been conducted. In
addition,lecturesrelatedto U-Marthave beenheldfor the purposeof educational
utilizationoftheU-Martsysteminseveraluniversities.AbookaboutU-Martbased
oneducationofeconomicswaspublishedinJapanesein2006.Thesamebookbutin
EnglishwaspublishedandreleasedbySpringerin2008.Asummerschooltargeting
the students of technical engineering graduate schools was also started. Another
U-Mart book for the teachers and students in the technical engineering field was
publishedinJapanesein2009.
There exist two kinds of trading methods in Tokyo Stock Exchange in Japan.
OneisthecallauctionmethodwhichiscalledItayosetradingmethodinJapanese
andtheotheroneisthecontinuousdoubleauctionmethodwhichiscalledZaraba
trading method.Initially, the U-Mart system was developedwith the focuson the
Itayosetradingmethodtobeusedforexperiments(U-MartVer.2).Theversionthat
supports the Zaraba trading method was developed later (U-Mart Ver.4). The U-
Martsystem currentlysupportsbothtradingmethodsandis usedforexperiments.
Specifications have been changed through development, while the system was
dividedintomodules.Thisdevelopmentactuallyproducedagraduateschoolstudent
who finished a doctorate. The U-Mart system currently supports the arbitrage
vii
viii Preface
transactions for spot trading and futures trading, while producing a wide variety
ofresearchandeducationalachievements.
Themarketisprimarilyanimportantstudyobjectiveofeconomics.Ithasbeen
about 250 years since economics became an independentfield of learning, where
researcherstriedtodescribeandanalyzeeconomicphenomenabydefiningconcepts
based on language. Adam Smith well explained the function of the market by
using“the invisiblehand.”With such insights, the conceptionof a self-organizing
structureofthemarketbegantodawnuponmankind.Sincemarketshadbeenself-
organizedandappearedbeforemankindasaspontaneousorder,webecameableto
graspthem.Asaresult,economicscameintotheworld.
The concept of differentiationdiscovered by Newton and Leibniz could reveal
themotionsofcelestialbodiesclearlyintheseventeenthcentury.Theseoutstanding
achievements of physics introduced the concept of differentiation into economics
andbroughtabouttheMarginalRevolutionineconomicsinthenineteenthcentury.
This enabled mathematical analysis on markets in addition to language-based
analysis.Asananecdote,“tosearchforwhatwehavelostonadarkstreetatnight
atwell-litplaces”wasborn;however,theanalysesofstandardeconomicsseparated
usalmostcompletelyfromunderstandingtheactualmarkets.Aglorioushistoryof
economictheoryactuallycametoadeadend.
However,thedevelopmentofcomputertechnologybroughtaboutmanyfindings
incomplicatedphenomena,andchaosisincludedasoneofthem.Thistechnological
advancement also made it possible to conduct simulations, which has enabled
to conduct realistic economic analysis. That is to say, agent-based simulations
(hereafter ABS) appeared. There exist a wide variety of ABS types. The U-
Martsystemsupportssimultaneousparticipationofcomputer-programmedmachine
agentsandhumanagents.Thisflexibilityinparticipantssignificantlycharacterizes
theU-MartsystemasanABS.ThisbookdescribesthesignificantmeaningoftheU-
Martsystemandthesystemcomponentsthatwerebuilt,alongwithacomprehensive
reportofthefindingsobtainedthroughtheU-Martsystem.
Markets continually evolve and develop new products. When comparing those
goodsthatappearedin paintingsdrawn200yearsagoandthe goodswe currently
handle in our daily life, we clearly notice that there is a world of difference
between both of them. New productsare being born not only in productmarkets,
butalsoinfinancialmarkets.Inadditiontotheproductkinds,transactionmethods
havealsochanged.Comparisonoftheadditionalvaluesproducedbetweenproduct
marketsandfinancialmarketsgivesusthefactthattheadditionalvaluesproduced
in financial markets have increased by about three times the values produced in
product market in a period of only 30 years after 1980. The recent financial
crisesclearlyshow thateventshappeningin financialmarketshavehad disastrous
impact on product markets. Amid such drastically changing market conditions,
first of all, we must understand what is actually happening in financial markets.
As for the trading conducted in a modern stock exchange, however, transaction
information is exchanged about 1000 times per second, while preprogrammed
computersparticipateintradingastraders.Forus,thedetailmechanismofamarket
andwhathappensinamillisecondwherefinancialtransactionsareconductedhave
Preface ix
been shrouded in darkness. In such an era, ABS is strongly required not only to
offer breakthrough for economic theory facing a dead end, but also to serve as a
tool to understand a market that continues to evolve and become more and more
complicated.TheU-MartProjectwillsurelyplayapartofthisrole.
Letmegiveasimple descriptiononthecontentofhowthisbookiscomposed.
PartIcontainsfourcomprehensivepapersbasedmainlyontheU-Martsystem.
Chapter 1 is authored by Professor Yoshinori Shiozawa, the mother of the U-
Mart Project. This chapter describes how ABS-based studies can be positioned
in the history of economics. Readers can understand the meaning of “the third
mode of scientific research” which is also found in the title of this book. With
the description of the dead end in which economics after the 1970s fell off, this
chaptergivesbasicdirectionandmethodsforeconomicsinordertobreakthrough
thisblindalleysituation.Itissuitabletostartthisbookasthefirstchapterwritten
basednotonthemereacademichistoryofeconomics,butonhistoricalbackgrounds
of theoretical issues that economics has to overcome. We would like not only
for younger researchers studying economics, but also those scientific researchers
engaginginstudiesofABStoreadthisbook.
Chapter2isauthoredbyanothermotheroftheU-MartProject,ProfessorHajime
Kita.Inthischaptertheauthorgivesusanoverviewofsocialsimulationsincluding
ABS. This chapter gives explanationsregardingthe advantagesand limitations of
eachmodelformodelinginaneasy-to-understandfashion.Thischapterisalsofor
researchers that are unfamiliar with this particular field. The engineering-related
ABS modelmightpresentan unfamiliarimpressionfor researchersof economics.
However, reading this chapter will help such researchers understand that ABS is
actuallyapplicabletoeconomicphenomena.
Chapter3givesthedescriptionoftheU-MartsystemwrittenbyProfessorIsao
OnoandProfessorHiroshiSatowhohaveengagedinthedevelopmentoftheU-Mart
system fromthe beginningofthis project.Thischapterdescribesthe fundamental
buildings of the U-Mart system, individual trading agent, differences from other
artificial markets, and the unique features of the U-Mart system. Use of the U-
Mart system requires a certain amount of knowledge with regard to the system
specifications. This chapter not only contains this required knowledge, but also
reports on the U-Mart system including its fundamental design policies. We also
believethiswillsurelybeofinteresttoresearchersofengineering.
Chapter 4 gives a future perspective on U-Mart and related ABS written by
Professor Takao Terano who is also one of the founders of U-Mart project.
The author states that U-Mart Project is very small; however, it has the unique
characteristicsofabigproject,andweshouldswitchtheprinciplesofconventional
artificialintelligenceapproachintoonestoraveloutintelligenceasagroupthrough
agent-based modeling. The requirements for ABS toward a new research scheme
are summarized; in addition, necessity of the mezzo-scopic structure between
the microscope and the macroscopic level for social and economic processes is
introduced.In spite of the shortchapter,it includesstimulatingcontentsformany
readers.