Dresden 2006 – scientific programme

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AKSOE: Physik sozio-ökonomischer Systeme

AKSOE 12: Economic Models and Evolutionary Game Theory II

AKSOE 12.5: Talk

Thursday, March 30, 2006, 12:15–12:45, BAR 205

The working of circuit breakers within percolation models for financial markets — •Gudrun Ehrenstein¹ and Frank Westerhoff² — ¹Institute for Theoretical Physics, Cologne University — ²Department of Economics, University of Osnabrueck, Rolandstrasse 8, D-49069 Osnabrueck, Germany

We use a modified Cont-Bouchaud model to explore the effectiveness of trading breaks. The modifications include that the trading activity of the market participants depends positively on historical volatility and that the orders of the agents are conditioned on the observed mispricing. Trading breaks, also called circuit breakers, interrupt the trading process when prices are about to exceed a pre-specified limit. We find that trading breaks are a useful instrument to stabilize financial markets. In particular, trading breaks may reduce price volatility and deviations from fundamentals.