Physics – Condensed Matter – Statistical Mechanics
Scientific paper
2000-11-02
Physics
Condensed Matter
Statistical Mechanics
9 pages, 7 figures, to appear in Quantitative Finance
Scientific paper
We address the question of market efficiency using the Minority Game (MG) model. First we show that removing unrealistic features of the MG leads to models which reproduce a scaling behavior close to what is observed in real markets. In particular we find that i) fat tails and clustered volatility arise at the phase transition point and that ii) the crossover to random walk behavior of prices is a finite size effect. This, on one hand, suggests that markets operate close to criticality, where the market is marginally efficient. On the other it allows one to measure the distance from criticality of real market, using cross-over times. The artificial market described by the MG is then studied as an ecosystem with different_species_ of traders. This clarifies the nature of the interaction and the particular role played by the various populations.
Challet Damien
Chessa Alessandro
Marsili Margherita
Zhang Yan-Chun
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