Regensburg 2007 – scientific programme

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AKSOE: Arbeitskreis Physik sozio-ökonomischer Systeme

AKSOE 14: Financial Markets and Risk Management III

AKSOE 14.4: Talk

Thursday, March 29, 2007, 15:30–16:00, H8

Endogenous drawdown outliers in the limit-order-book — •Gilles Daniel and Didier Sornette — ETH Zürich, Chair of Entrepreneurial Risks, Zürich, Switzerland

We investigate by means of computer simulations the intra-day dynamics of stock markets. The main statistical properties of price changes exhibited by real markets can be recovered with a zero-intelligence model of agents. Their origin is found in the subtle interplay between limit orders, which supply liquidity, and market and cancellation orders, which remove it.

We then propose a parsimonious model of self-referential agents grounded on documented behavioral finance, in which rational bubbles can emerge, grow and burst endogenously, with no need for a reference to an exogenous fundamental value, and no need for communication between agents. These bubbles and crashes correspond to a regime shift in the system, are quantified by robust measures of drawdowns, and can be distinguished from the rest of the distribution of returns: they are statistical outliers. Thus the statistics reveals the existence of transient collective organizations of the self-referential agents which create particular market phases associated with the bubbles and crashes. These results are very similar to previous studies on the statistics of drawdowns in real financial time series, suggesting a common origin.