The minimal model of financial complexity

Philip Z. Maymin

Research output: Contribution to journalArticle

Abstract

A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.

Original languageEnglish (US)
Pages (from-to)1371-1378
Number of pages8
JournalQuantitative Finance
Volume11
Issue number9
DOIs
StatePublished - Sep 2011

Fingerprint

Random walk
Investors
Time series models
Ticks
Crash
Trading strategies
Security price
Asset markets
Fat tails

Keywords

  • Agent based modelling
  • Artificial economy
  • Behavioural finance
  • Cellular automata
  • Chaos theory
  • Complexity in finance
  • Dynamic models
  • Dynamical systems

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Finance

Cite this

The minimal model of financial complexity. / Maymin, Philip Z.

In: Quantitative Finance, Vol. 11, No. 9, 09.2011, p. 1371-1378.

Research output: Contribution to journalArticle

Maymin, Philip Z. / The minimal model of financial complexity. In: Quantitative Finance. 2011 ; Vol. 11, No. 9. pp. 1371-1378.
@article{a452e7c66d7e496285dab562ef0f5409,
title = "The minimal model of financial complexity",
abstract = "A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.",
keywords = "Agent based modelling, Artificial economy, Behavioural finance, Cellular automata, Chaos theory, Complexity in finance, Dynamic models, Dynamical systems",
author = "Maymin, {Philip Z.}",
year = "2011",
month = "9",
doi = "10.1080/14697681003709447",
language = "English (US)",
volume = "11",
pages = "1371--1378",
journal = "Quantitative Finance",
issn = "1469-7688",
publisher = "Routledge",
number = "9",

}

TY - JOUR

T1 - The minimal model of financial complexity

AU - Maymin, Philip Z.

PY - 2011/9

Y1 - 2011/9

N2 - A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.

AB - A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.

KW - Agent based modelling

KW - Artificial economy

KW - Behavioural finance

KW - Cellular automata

KW - Chaos theory

KW - Complexity in finance

KW - Dynamic models

KW - Dynamical systems

UR - http://www.scopus.com/inward/record.url?scp=80052279276&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=80052279276&partnerID=8YFLogxK

U2 - 10.1080/14697681003709447

DO - 10.1080/14697681003709447

M3 - Article

AN - SCOPUS:80052279276

VL - 11

SP - 1371

EP - 1378

JO - Quantitative Finance

JF - Quantitative Finance

SN - 1469-7688

IS - 9

ER -