The evolving cobweb of relations among partially rational investors

Abstract

To overcome the limitations of neoclassical economics, researchers have leveraged tools of statistical physics to build novel theories. The idea was to elucidate the macroscopic features of financial markets from the interaction of its microscopic constituents, the investors. In this framework, the model of the financial agents has been kept separate from that of their interaction. Here, instead, we explore the possibility of letting the interaction topology emerge from the model of the agents’ behavior. Then, we investigate how the emerging cobweb of relationship affects the overall market dynamics. To this aim, we leverage tools from complex systems analysis and nonlinear dynamics, and model the network of mutual influence as the output of a dynamical system describing the edge evolution. In this work, the driver of the link evolution is the relative reputation between possibly coupled agents. The reputation is built differently depending on the extent of rationality of the investors. The continuous edge activation or deactivation induces the emergence of leaders and of peculiar network structures, typical of real influence networks. The subsequent impact on the market dynamics is investigated through extensive numerical simulations in selected scenarios populated by partially rational investors.

A two-layer model for coevolving opinion dynamics and collective decision-making in complex social systems

“…Existing literature [61][62][63] has recognized that in financial markets, there is a coevolution of a trader's (individual) reputation and trading strategies; while the reputation can be generally modeled through a continuous variable (similar to opinions), the trading strategies can either be represented as edge creation/deletion operations 62 , or as a complex decision-making process 63 . Ideas drawn from these existing works may enable our proposed framework to better describe the phenomena studied in this work and suggest their possible extension to the particular application of financial markets.…”

Connectivity, Information Jumps, and Market Stability: An Agent-Based Approach

“…Also, researchers addressed the role of network theory and agents direct interactions of model such as the models of Panchenko et al [22], Yeh and Yang [23], Delellis et al [24,25], and Khashanah and Alsulaiman [1,26]. For more details of the ABM in market microstructure, readers may refer to [27][28][29][30].…”

Distribution of Node Characteristics in Evolving Tripartite Network

“…These topological functions of networks prove to be extremely important as they have a strong impact on the characteristics of networks such as robustness or vulnerability [ 1 , 2 ] and others. In various contexts, the development of a complex network topology was considered as an output of a dynamic system with state variables associated with edges and nodes; see [ 3 , 4 , 5 ]. The dynamics of these actors (nodes and edges) and their connection patterns influence evolution of networks, their structure and processes ongoing on affected networks.…”