Keywords
climate change; natural hazard; financial market; herding behaviour; price dynamics.
Location
Session A4: Modelling for Low Carbon Economies
Start Date
13-7-2016 9:50 AM
End Date
13-7-2016 10:10 AM
Abstract
In many economic models (including many models from economics of climate change) the agents make decisions solely on the basis of ‘objective’ information (e.g., the market price level). However, a number of alternative modeling frameworks have been developed, where individual economic agents, when making decisions, take into account the observed behavior of other economic agents. One of pioneering contributions to this research area was the Kirman’s ‘ant model’ (Kirman, 1993). While initially the model was applied to describing the collective behavior of social insects (ants), later it was extensively used for describing the ‘herding behavior’ in economic systems. Particularly, ‘herding behavior’ of traders is in the core of a model of a financial market proposed by Alfarano et al. (2008). In the model a system of individual traders of three types is considered: fundamentalist traders, optimistic noise traders, and pessimistic noise traders. The decision-making of fundamentalists buying and selling the units of an asset is based on ‘objective’ information solely (i.e. on the perceived ‘fundamental’ value of the asset price). The total number of all noise traders is constant in time; however, the number of optimists taken separately (and therefore the number of pessimists) fluctuates, and the dynamics of fluctuations are described by a modified stochastic Kirman’s ant model. In our previous study (Lebedeva and Kovalevsky, 2015) we modified the model by Alfarano et al. (2008) outlined above by going beyond a simplifying approximation of instantaneous market clearing and exploring the model with the full dynamic version of Walrasian price adjustment law. In the present paper we first report new results of numerical and analytical studies of the model modified in such a way. Then, we make one more modification, from now on treating the ‘fundamental’ value of the asset price not as a constant, but rather as a stochastic variable affected by exogenous shocks. Particularly, these shocks, temporarily reducing the ‘fundamental’ price of the asset, might be caused by climate-related natural hazards. These modifications of the model allow us studying the interplay of external (climate-related) and internal (herding-related) stochasticity on the financial market jointly affecting the asset price dynamics.
Included in
Civil Engineering Commons, Data Storage Systems Commons, Environmental Engineering Commons, Hydraulic Engineering Commons, Other Civil and Environmental Engineering Commons
Modeling Herding Behavior on Financial Markets Affected by Exogenous Climate-Related Shocks
Session A4: Modelling for Low Carbon Economies
In many economic models (including many models from economics of climate change) the agents make decisions solely on the basis of ‘objective’ information (e.g., the market price level). However, a number of alternative modeling frameworks have been developed, where individual economic agents, when making decisions, take into account the observed behavior of other economic agents. One of pioneering contributions to this research area was the Kirman’s ‘ant model’ (Kirman, 1993). While initially the model was applied to describing the collective behavior of social insects (ants), later it was extensively used for describing the ‘herding behavior’ in economic systems. Particularly, ‘herding behavior’ of traders is in the core of a model of a financial market proposed by Alfarano et al. (2008). In the model a system of individual traders of three types is considered: fundamentalist traders, optimistic noise traders, and pessimistic noise traders. The decision-making of fundamentalists buying and selling the units of an asset is based on ‘objective’ information solely (i.e. on the perceived ‘fundamental’ value of the asset price). The total number of all noise traders is constant in time; however, the number of optimists taken separately (and therefore the number of pessimists) fluctuates, and the dynamics of fluctuations are described by a modified stochastic Kirman’s ant model. In our previous study (Lebedeva and Kovalevsky, 2015) we modified the model by Alfarano et al. (2008) outlined above by going beyond a simplifying approximation of instantaneous market clearing and exploring the model with the full dynamic version of Walrasian price adjustment law. In the present paper we first report new results of numerical and analytical studies of the model modified in such a way. Then, we make one more modification, from now on treating the ‘fundamental’ value of the asset price not as a constant, but rather as a stochastic variable affected by exogenous shocks. Particularly, these shocks, temporarily reducing the ‘fundamental’ price of the asset, might be caused by climate-related natural hazards. These modifications of the model allow us studying the interplay of external (climate-related) and internal (herding-related) stochasticity on the financial market jointly affecting the asset price dynamics.
