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Market behavior and performance of different strategy evaluation schemes
Umeå University, Faculty of Science and Technology, Department of Physics. (Integrated Science Lab(IceLab))
2010 (English)In: Physical Review E. Statistical, Nonlinear, and Soft Matter Physics, ISSN 1063-651X, E-ISSN 1095-3787, Vol. 82, no 026109Article in journal (Refereed) Published
Abstract [en]

Strategy evaluation schemes are a crucial factor in any agent-based market model, as they determine the agents’ strategy preferences and consequently their behavioral pattern. This study investigates how the strategy evaluation schemes adopted by agents affect their performance in conjunction with the market circumstances. We observe the performance of three strategy evaluation schemes, the history-dependent wealth game, the trend-opposing minority game, and the trend-following majority game, in a stock market where the price is exogenously determined. The price is either directly adopted from the real stock market indices or generated with a Markov chain of order ≤2. Each scheme’s success is quantified by average wealth accumulated by the traders equipped with the scheme. The wealth game, as it learns from the history, shows relatively good performance unless the market is highly unpredictable. The majority game is successful in a trendy market dominated by long periods of sustained price increase or decrease. On the other hand, the minority game is suitable for a market with persistent zigzag price patterns. We also discuss the consequence of implementing finite memory in the scoring processes of strategies. Our findings suggest under which market circumstances each evaluation scheme is appropriate for modeling the behavior of real market traders.

Place, publisher, year, edition, pages
American Physical Society , 2010. Vol. 82, no 026109
URN: urn:nbn:se:umu:diva-36586DOI: 10.1103/PhysRevE.82.026109OAI: diva2:354820
Available from: 2010-10-06 Created: 2010-10-04 Last updated: 2010-10-06Bibliographically approved

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Lee, Sang Hoon
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