Sequential Detection of Market shocks using Risk-averse Agent Based Models
Abstract
This paper considers a statistical signal processing problem involving agent based models of financial markets which at a micro-level are driven by socially aware and risk- averse trading agents. These agents trade (buy or sell) stocks by exploiting information about the decisions of previous agents (social learning) via an order book in addition to a private (noisy) signal they receive on the value of the stock. We are interested in the following: (1) Modelling the dynamics of these risk averse agents, (2) Sequential detection of a market shock based on the behaviour of these agents. Structural results which characterize social learning under a risk measure, CVaR (Conditional Value-at-risk), are presented and formulation of the Bayesian change point detection problem is provided. The structural results exhibit two interesting prop- erties: (i) Risk averse agents herd more often than risk neutral agents (ii) The stopping set in the sequential detection problem is non-convex. The framework is validated on data from the Yahoo! Tech Buzz game dataset.
Cite
@article{arxiv.1511.01965,
title = {Sequential Detection of Market shocks using Risk-averse Agent Based Models},
author = {Vikram Krishnamurthy and Sujay Bhatt},
journal= {arXiv preprint arXiv:1511.01965},
year = {2015}
}