Three-state herding model of the financial markets
Institute of Theoretical Physics and Astronomy, Vilnius University - A. Gostauto st. 12, 01108 Vilnius, Lithuania, EU
Received: 5 October 2012
Accepted: 4 January 2013
We propose a Markov jump process with the three-state herding interaction. We see our approach as an agent-based model for the financial markets. Under certain assumptions this agent-based model can be related to the stochastic description exhibiting sophisticated statistical features. Along with power-law probability density function of the absolute returns we are able to reproduce the fractured power spectral density, which is observed in the high-frequency financial market data. The given example of consistent agent-based and stochastic modeling will provide a background for further developments in the research of complex social systems.
PACS: 89.65.Gh – Economics; econophysics, financial markets, business and management / 02.50.Ga – Markov processes / 05.10.Gg – Stochastic analysis methods (Fokker-Planck, Langevin, etc.)
© EPLA, 2013