Towards Behaviorly Realistic Simulations of the Stock Market (Traders with a Soul)

Abstract

The price fluctuations in the financial markets are the result of the individual operations by many individual investors. However for many decades the finacial theory did not use directly this "microscopic representation". The difficulties preventing it were multiple but the main two are being solved recently with the advent of modern computer technology: - massive detailed data on the individual market operations became available. - "microscopic simulations" of the stock markets in terms of their individual participating agents allow a very realistic treatment of the problem. Consequently, we are now able to confront real market data with the results of simulating "microscopic" realistic models which include any desired features in the investors behavior: departures from rationality, herding effects, heterogenous investor-specific trading strategies etc. In this way we propose to understand, explain and may be predict the macroscopic market behavior.