Simulation and validation of an integrated markets model

Brian Sallans, Alexander Pfister, Alexandros Karatzoglou, Georg Dorffner

Publication: Working/Discussion PaperWU Working Paper

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Abstract

The behavior of boundedly rational agents in two interacting markets is investigated. A discrete-time model of coupled financial and consumer markets is described. The integrated model consists of heterogenous consumers, financial traders, and production firms. The production firms operate in the consumer market, and offer their shares to be traded on the financial market. The model is validated by comparing its output to known empirical properties of real markets. In order to better explore the influence of model parameters on behavior, a novel Markov chain Monte Carlo method is introduced. This method allows for the efficient exploration of large parameter spaces, in order to find which parameter regimes lead to reproduction of empirical phenomena. It is shown that the integrated markets model can reproduce a number of empirical "stylized facts", including learning-by-doing effects, fundamental price effects, low autocorrelations, volatility clustering, high kurtosis, and volatility-volume correlations. (author's abstract)
Original languageEnglish
Place of PublicationVienna
PublisherSFB Adaptive Information Systems and Modelling in Economics and Management Science, WU Vienna University of Economics and Business
Publication statusPublished - 2003

Publication series

NameWorking Papers SFB "Adaptive Information Systems and Modelling in Economics and Management Science"
No.95

WU Working Paper Series

  • Working Papers SFB \Adaptive Information Systems and Modelling in Economics and Management Science\

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