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

!!!!!!!

www.syrtoproject.eu

This document reflects only the author’s views. The European Union is not liable for any use that may be made of the information contained therein.