Introducing Social Investors into MultiAgent Models of Financial Markets

1
Introducing Social Investors into Multi-Agent
Models of Financial Markets

• Stephen Chen, Brenda Spotton Visano, and Ying
  KongYork University

2
What is a Social Investor?

• Trend Investors
• Buy when prices are going up
• aka momentum investors, technical analysts, noise
  investors
• Social Investors
• Buy when others are buying

3
What is the Role of Social Investors?

• What happens during a mania or market bubble?
• Irrational Exuberance
• Market bubbles tend to coincide with increases in
  market participation

4
Why use a Multi-Agent Model?

• Capture the dynamics of the event
• Model a larger number of actors and interactions
• Mathematical intractability
• Test intervention strategies

5
Existing Models of Financial Crises

• Financial instability (Banking crises)
• Game theory models of discrete time events e.g.
  coordination failure
• Market bubbles and crashes
• Mostly qualitative analysis e.g. socio-economic
  factors, new technology, new market mechanisms,
  etc

6
Existing Multi-Agent Models

• Developed to model distributions of price changes
  ? fat tails
• Models have two investor types
• Fundamental and Noise/Trend
• Models focus on communication processes

7
Game Theory

• Actors each have a choice, and the reward of each
  choice depends on the action of the other actor

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Nash Equilibria

• First actor makes a decision, second actor picks
  optimal decision based on first actors decision,
  first actors optimal decision is the original
  decision

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Example of Nash Equilibrium

• Actor 1 Cooperates
• Actor 2 Defects
• 5 benefit vs. 1
• Actor 1 Defects
• -5 benefit vs. -10
• Actor 2 still Defects
• Nash Equilibrium

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Game Theory behind Multi-Agent Model

• Two actors Fundamental and Trend
• Fundamental buying causes price to go up
• Trend buying because price is going up
• Fundamental selling because price is too high
• Trend selling because price is going down

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Game Theory behind Multi-Agent Model II

• Two actors Informed and Social
• Informed buying causes prices to go up
• Social buying because others are buying causes
  prices to keep going up
• Informed keep buying because prices are going up

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Model Results

• Only two states overly sinusoidal price trends

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Current Results

• Actors Fundamental, Trend, and Social
• No Nash equilibrium

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Summary

• Existing (theoretical) tools are not suitable for
  the modelling of all economic phenomena
• Easy to model stable or unstable systems, but
  hard to model semi-stable systems

15
Future Work

• Sensitivity testing analysis of key factors
  between stable and unstable systems
• Interventions strategies attempts to ameliorate
  a market bubble in real time