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Introducing Social Investors into Multi-Agent Models of Financial Markets

Introducing Social Investors into Multi-Agent Models of Financial Markets. Stephen Chen, Brenda Spotton Visano, and Ying Kong York University. What is a Social Investor?. Trend Investors Buy when prices are going up aka momentum investors, technical analysts, noise investors Social Investors

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Introducing Social Investors into Multi-Agent Models of Financial Markets

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  1. Introducing Social Investors into Multi-Agent Models of Financial Markets Stephen Chen, Brenda Spotton Visano, and Ying KongYork University

  2. What is a Social Investor? • Trend Investors • Buy when prices are going up • aka momentum investors, technical analysts, noise investors • Social Investors • Buy when others are buying IEA-AIE 2006

  3. What is the Role of Social Investors? • What happens during a mania or market bubble? • “Irrational Exuberance” • Market bubbles tend to coincide with increases in market participation IEA-AIE 2006

  4. Why use a Multi-Agent Model? • Capture the dynamics of the event • Model a larger number of actors and interactions • Mathematical intractability • Test intervention strategies IEA-AIE 2006

  5. Existing Models of Financial Crises • Financial instability (Banking crises) • Game theory models of discrete time events – e.g. coordination failure • Market bubbles and crashes • Mostly qualitative analysis – e.g. socio-economic factors, new technology, new market mechanisms, etc IEA-AIE 2006

  6. Existing Multi-Agent Models • Developed to model distributions of price changes  “fat tails” • Models have two investor types • Fundamental and Noise/Trend • Models focus on communication processes IEA-AIE 2006

  7. Game Theory • Actors each have a choice, and the reward of each choice depends on the action of the other actor IEA-AIE 2006

  8. Nash Equilibria • First actor makes a decision, second actor picks optimal decision based on first actor’s decision, first actor’s optimal decision is the original decision IEA-AIE 2006

  9. Example of Nash Equilibrium • Actor 1 Cooperates • Actor 2 Defects • +5 benefit vs. +1 • Actor 1 Defects • -5 benefit vs. -10 • Actor 2 still Defects • Nash Equilibrium IEA-AIE 2006

  10. Game Theory behind Multi-Agent Model • Two actors – Fundamental and Trend • Fundamental buying causes price to go up • Trend buying because price is going up • Fundamental selling because price is too high • Trend selling because price is going down IEA-AIE 2006

  11. Game Theory behind Multi-Agent Model II • Two actors – Informed and Social • Informed buying causes prices to go up • Social buying because others are buying causes prices to keep going up • Informed keep buying because prices are going up IEA-AIE 2006

  12. Model Results • Only two states – overly sinusoidal price trends IEA-AIE 2006

  13. Current Results • Actors: Fundamental, Trend, and Social • No Nash equilibrium IEA-AIE 2006

  14. Summary • Existing (theoretical) tools are not suitable for the modelling of all economic phenomena • Easy to model stable or unstable systems, but hard to model semi-stable systems IEA-AIE 2006

  15. Future Work • Sensitivity testing – analysis of key factors between stable and unstable systems • Interventions strategies – attempts to ameliorate a market bubble in “real time” IEA-AIE 2006

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