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Financial Symmetry and Moods in the Markets
SYstemic Risk TOmography:
Signals, Measurements, Transmission Channels, and Policy Interventions
Jorgen Vitting Andersen
Centre National de la Recherche Scientifique (Paris – France) !Seminar at the Department of Economics and Management of the University of Brescia
Brescia, November 26 2013
!
Price fluctuations, symmetry breaks and excess risk taking
!• We study the outcome of aggregate decision
making when humans use different trading strategies in their decisions to buy/sell an asset !
• Using a theoretical framework of agent based modeling/game theory we are able to estimate the likelihood of a state of excessive risk taking
Model• Agents use: • i) Technical analysis: decision tables using last
m days price directions in prediction !!!!!
• ii) Fundamental value analysis: buy if price is low, sell if price is high
Parameters of the Minority Game / $-game
• m – memory • s – number of strategies of each agent • N – number of agents !
• Total number of strategies.: 2**(2**m)
Dynamics of the Minority Game / $-game
•
$G versus MG
Some «stylized facts» for the MG
Reverse Engineering is possible
Predictiction of big swings in the market
The idea of decoupling
States of aggregate decision making• Given a constant fundamental value of the asset,
the aggregate decision making can either lead to i) a fundamental value state (top plot) or ii) excessive risk taking (two lower plots)
A ratio determining what outcome to expect in the aggregate decision making
• We find that the ratio: !!
is determining for the outcome of the aggregate decision making !• The nominator is the amount of information used by the
agents in their decision making, and the denominator is the number of agents (N) times the number of strategies (s) they posses.
Likelihood of excessive risk taking (blue)
!!!!!!
• Different N,s but same T: compare 2nd, 4th row left plot to 1st and 3rd row on right plot
This project is funded by the European Union under the
7th Framework Programme (FP7-SSH/2007-2013) Grant Agreement n°320270
!!!!!!!
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