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created with NetLogo
view/download model file: lmmodel.nlogo
WHAT IS IT?
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This is a model of a financial market with heterogeneous agents.
Some of them are influenced by the sentiment of their closest
colleagues regarding the future evolution of the market, while
the others act in a rational way.
Our model tries to replicate the work of Thomas Lux and Michele
Marchesi in Moduleco with Netlogo, and can be considered a
revised version of Artificial Financial Market
(made by Carlos Pedro Gonçalves, 2003), a model that can be
found in your Netlogo Models Library.
The crucial difference between our work and AFM is the
introduction of a new kind of agent, which acts on a rational
base, and makes its decision on the basis of the real value of
the share.
The market is simplified, as it contains just one kind of share
and the operators can trade only one unit per time.
Every period, news (good or bad) reaches the market, and each
operator can choose between selling and buying a share.
HOW TO USE IT
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Click the SET UP button to set up the operators (patches).
Click the GO button to run the simulation.
The operators, or agents, can be divided in two categories:
“noise-traders” (NT) and “fundamentalist” (FD).
With the slider FUNDAMENTALIST you can choose the average
percentage of fundamentalists.
The NT are characterized, as in AFM, by the volatility of their
opinions, their sensitivity to the news, their propensity to
sentiment contagion and to imitation (the sentiment contagion
refers to the sentiments of the NT surrounding the patch; the
imitation is concerned with the FD neighbours).
To set these features you can use the slides provided. Each slide
defines the maximal value which the features can reach. Then
every operator gets a randomly-distributed value between 0 and
the max.
The FD have only one feature: the behavior volatility, which
determines their chances of turning into NT.
The GO procedure is based on the AFM model. First new information
arrives on market, and as in AFM the news has a normal
distribution with a mean of zero. Despite all the values which
the news can have, every value above 0 is turned into 1 (good
news) and every value below 0 is turned into -1 (bad news).
The NT act first: they set up their opinion (they can be
optimistic or pessimistic) and then decide between buying and
selling.
As in AFM, the opinion is the results of many factors: the
opinion of the NT neighbours (as it was in the last period)
multiplied by the propensity to sentiment contagion, the mood of
the FD neighbours multiplied by the propensity to imitation, the
nature of the news, multiplied by the news-sensitivity, and a
random value normally distributed (the mean of the random value
is set by the slider EPSILON, while its variance is set by the
slider OPINION-VOL).
The behavior of the NT is partially rational, as the new
information affects their behavior. It is also partially
irrational, as it takes into account the behavior of the
neighbours during the last period, and there is also a random
component in their decision rule.
The FD act after the NT, but as a matter of fact they don’t
take into account the action of the NT this period, they just
compare price and real value of the share and act as a
consequence.
After all the trading the price and the return of the share are
obtained as a result of everybody’s action.
If the return of the share moves in the direction “suggested”
by the new information, the irrational operators become more
confident on their neighbours, and the herd behavior of the NT
increases. That means the propensity to market contagion is
increased by the amount of the return. The effect is the same if
after a good news the return increases, or after a bad news the
return decreases. If the news is not followed by the expected
movement of return, the confidence decreases.
At the end of every period every patch has a certain chance of
changing the type: the NT have a chance set by the slider NEW
FUNDAMENTALIST of turning into fundamentalists.
On the other hand FD can turn optimistic or pessimistic if one of
the two groups has a number of members at least as big as the
value of the slider OPINION VOLATILITY surrounding the
fundamentalist patch.
THINGS TO NOTICE
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Our model, as Artificial Financial Market, presents very frequent
crashes and bubbles, normally due to an unusual dominance of one
mood over the other in the NT.
AFT simulations often end up in polarized situations, with black
areas and pink areas well defined. However, in our model, these
situations are basically avoided. This is due to the existence of
Fundamentalist operators, who act regardless of their neighbours.
A rational behavior can enhance the chances of abnormal movements
of the price as the rational agents move in the same direction at
the same time.
NETLOGO FEATURES
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The screen is the market, the white patches are the
fundamentalists, while the pink ones are the optimistic NT, and
the black ones are the pessimistic NT.
The simulation has also four graphs: the price, the return, the
volatility of return, and the variations of the price as a
percentage are plotted against time.
If you want to notice what happens at every step of the period
you can click the button STEP ONCE instead of GO.
SETTING THE PARAMETERS
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It can be interesting to see what happens to the market if you
change MAX-NEWS-SENSIBILITY, PROPENSTY-TO-IMITATION, and
PROPENSITY-TO SENTIMENT-CONTAGION.
While higher values of the first two parameters will probably
lead to an unstable market, the third parameter is positively
correlated to polarization.
EXTENDING THE MODEL
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In our model, as explained before, the transactions regard only
one share per time.
What if the agents could swap more shares for each transation?