Classification of Flash Crashes Using the Hawkes(p,q) Framework

Wehrli, Alexander; Sornette, Didier

doi:10.2139/ssrn.3724073

Cited by 2 publications

(2 citation statements)

References 15 publications

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“…The most serious specific critiques of the EMH include its inability to explain periods of out-of-equilibrium behaviour such as endogenous crises [11,12] or the ‘stylized facts’ present in economic markets such as volatility clustering where periods of high (low) volatility occur in bursts, in the absence of any significant external news [13]. Such crises are known to occur in different markets, from housing markets [14,15], to stock markets [16], and foreign exchange markets [17]. Likewise, volatility clustering is consistently observed in markets [18], with temporal correlations in volatility breaching the traditional economic assumption of heteroskedasticity.…”

Section: Introductionmentioning

confidence: 99%

Bounded strategic reasoning explains crisis emergence in multi-agent market games

Evans

Prokopenko

2023

R. Soc. open sci.

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The efficient market hypothesis (EMH), based on rational expectations and market equilibrium, is the dominant perspective for modelling economic markets. However, the most notable critique of the EMH is the inability to model periods of out-of-equilibrium dynamics without significant external news. When such dynamics emerge endogenously, the traditional economic frameworks prove insufficient. This work offers an alternate perspective explaining the endogenous emergence of punctuated out-of-equilibrium dynamics based on bounded rational agents. In a concise market entrance game, we show how boundedly rational strategic reasoning can lead to endogenously emerging crises, exhibiting fat tails in returns. We also show how other common stylized facts, such as clustered volatility, arise due to agent diversity (or lack thereof) and the varying learning updates across the agents. This work explains various stylized facts and crisis emergence in economic markets, in the absence of any external news, based on agent interactions and bounded rational reasoning.

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Section: Introductionmentioning

confidence: 99%

Bounded strategic reasoning explains crisis emergence in multi-agent market games

Evans

Prokopenko

2023

R. Soc. open sci.

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show abstract

“…The most serious specific critiques of the EMH include its inability to explain periods of out-of-equilibrium behaviour such as endogenous crises [9,10] or the "stylised facts" present in economic markets such as volatility clustering where periods of high (low) volatility occur in bursts, in the absence of any significant external news [11]. Such crises are known to occur in different markets, from housing markets [12,13], to stock markets [14], and foreign exchange markets [15]. Likewise, volatility clustering is consistently observed in markets [16], with temporal correlations in volatility breaching the traditional economic assumption of heteroskedasticity.…”

Section: Introductionmentioning

confidence: 99%

Bounded strategic reasoning explains crisis emergence in multi-agent market games

Evans¹,

Prokopenko²

2022

Preprint

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The efficient market hypothesis (EMH), based on rational expectations and market equilibrium, is the dominant perspective for modelling economic markets. However, the most notable critique of the EMH is the inability to model periods of out-of-equilibrium behaviour in the absence of any significant external news. When such dynamics emerge endogenously, the traditional economic frameworks provide no explanation for such behaviour and the deviation from equilibrium. This work offers an alternate perspective explaining the endogenous emergence of punctuated out-of-equilibrium dynamics based on bounded rational agents. In a concise market entrance game, we show how boundedly rational strategic reasoning can lead to endogenously emerging crises, exhibiting fat tails in "returns". We also show how other common stylised facts of economic markets, such as clustered volatility, can be explained due to agent diversity (or lack thereof) and the varying learning updates across the agents. This work explains various stylised facts and crisis emergence in economic markets, in the absence of any external news, based purely on agent interactions and bounded rational reasoning.

show abstract

Classification of Flash Crashes Using the Hawkes(p,q) Framework

Cited by 2 publications

References 15 publications

Bounded strategic reasoning explains crisis emergence in multi-agent market games

Bounded strategic reasoning explains crisis emergence in multi-agent market games

Bounded strategic reasoning explains crisis emergence in multi-agent market games

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