Berlin 2015 – wissenschaftliches Programm

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SOE: Fachverband Physik sozio-ökonomischer Systeme

SOE 1: Tutorial: From spin models to macroeconomics (SOE, DY, jDPG)

SOE 1.2: Tutorium

Sonntag, 15. März 2015, 16:50–17:40, H 0104

Connecting microscopic behavioral economics to macroscopic financial market models — •Sebastian M. Krause — Rudjer Boskovic Institute, Zagreb, Croatia

Time series of prices show the stylized facts of broadly distributed price jumps which occur clustered. This has serious implications for the accumulation of risk. Macroscopic price evolution models for estimating risk are commonly used. They extend the random walk by including auxiliary volatility variables to model time dependent volatility. On the other hand, agent based models that include behavioral insights are used to enlighten the mechanisms behind stylized facts. This could help to predict crashes and to improve market regulation.

After briefly illustrating this background, I discuss a way of interconnecting these two strands of research. Using an agent based model with herding, I exemplify a general recipe for finding macroscopic models numerically: A macroscopic variable which might control volatility is identified; The stochastic process ruling this volatility variable is measured, using the numeric evolution of the microscopic model. This procedure is suitable for models with puzzling emergent behavior, as well as for complicated models with many parameters. The resulting macroscopic price evolution model can be much simpler, allowing for proceeding investigations. Therefore, the field of agent based modeling profits from a macroscopic description. Another advantage is the microfoundation of macroscopic financial market models which are so far pure phenomenological. The auxiliary volatility variable can inherit a clear behavioral meaning from the microscopic model.