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A re-examination of the "zero is enough" hypothesis in the emergence of financial stylized facts
Sorbonne Grad Business Sch, France .
Linköping University, Department of Management and Engineering, Production Economics. Linköping University, The Institute of Technology.
ENSAM Paristech, France .
Telecom Bretagne, France .
2012 (English)In: Journal of Economic Interaction and Coordination, ISSN 1860-711X, E-ISSN 1860-7128, Vol. 7, no 2, 223-248 p.Article in journal (Refereed) Published
Abstract [en]

In recent years, a growing literature has claimed that the market microstructure is sufficient to generate the so-called stylized facts without any reference to the behaviour of market players. Indeed, qualitative stylized-facts can be generated with zero-intelligence traders (ZITs) but we stress that they are without any quantitative predictive power. In this paper we show that in most of the cases, such qualitative stylized facts hide unrealistic price motions at the intraday level and ill-calibrated return processes as well. To generate realistic price motions and return series with adequate quantitative values is out-of-reach using pure ZIT populations. To do so, one must increasingly constrain agents choices to a point where it is hard to claim that their behaviour is completely random. In addition we show that even with highly constrained ZIT agents, one cannot reproduce real time series from these. Except in a few cases, first order moments of ZITs never equal real data ones. We therefore claim that stylized facts produced by means of ZIT agents are useless for financial engineering.

Place, publisher, year, edition, pages
Springer Verlag (Germany) , 2012. Vol. 7, no 2, 223-248 p.
Keyword [en]
Agent based modelling, Time series analysis, Financial markets, Heterogeneity of agents, Market microstructure
National Category
Engineering and Technology
URN: urn:nbn:se:liu:diva-84891DOI: 10.1007/s11403-012-0099-0ISI: 000309235400007OAI: diva2:562947
Available from: 2012-10-26 Created: 2012-10-26 Last updated: 2012-10-26

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Corelli, Angelo
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Production EconomicsThe Institute of Technology
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