Dynamics Of Securities Market And Analysis Based On Agent-Based Modeling

In the later half of the last century, the modern finance including efficient market theory, portfolio management theory, capital asset pricing theory and option pricing theory was built rapidly and soon applied to many new practices of finance successfully. The modern finance was on the way to success. But in recent years a body of evidence on anomalies such as frequency of finance crises, excess volatility, fat tailed distributions of returns, size effect, under- and overreactions, has presented a sharp challenge to efficient market hypothesis (EMH). Anomalies are attracting significant interest across a broad range of disciplines such as psychology, physic, complex adaptive system and artificial intelligence. The representative theories of new finance are behavior finance, fractal market hypothesis (FMH), econophysics and agent-based computational economics (ACE).After studied on the literatures, we point out that the key issue of new finance theory is building the dynamics mechanism of security (equity) market. The dynamics mechanism analyzes the fundamental ways of actions and interactions of elementary factors, for example, the mode of investor's expect, the law of the decision and the mechanism of the price, etc.The main work and conclusion are as follows:1. Define and study the dynamics mechanism of security (equity) market. This work is the main thread of our paper. Analyzing and representing both the old mechanism implied by traditional theories and new mechanism we proposed get through the whole paper. We classify the old mechanism as static mechanism and the new mechanism based on complex adaptive system as dynamic mechanism. We also point out that models under the static mechanism especially behavior finance models are not contradictory to, but snapshot-analysis of those under dynamic mechanism.The dynamics of modern finance can be simply described as rational expectations equilibrium, which is characterized as homogeneous expectations, deductive reasoning, equilibrium mechanism and supported by rational arbitrage. The dynamics of behavior finance is characterized as heterogeneous investors' expectations, bounded rationality and psychological bias of normal utility function; but it does not abandon deductive reasoning and equilibrium mechanism frame. Complex adaptive system motivates us to present the newdynamics mechanism: an evolving equilibrium system based on diversified inductive reasoning. In the new dynamics investors are neither homogeneous nor heterogeneous but diversified. Because of the imperfect information, diversified investors have to make their decisions by inductive reasoning, and keep learning to adapt to the evolving market. This is a more unified and more realistic dynamics mechanism.2. Our study on dynamics of securities market focuses on explaining the anomalies because the existing evidence of anomalies is the main challenge to efficient market hypothesis. Our work can be divided into two parts, which we term "static model" and "dynamic model".In the part of static model, we propose an investors' beliefs model that also can be classified into behavior finance. The new model including a qualitative sub model and an analytical sub model is yet based on expectations equilibrium mechanism but absorbs ideas from complex adaptive system, for example, inductive reasoning and learning. The qualitative sub model can explain the dynamic interaction between price and trade volume, this is valuable to understand market mechanism. Analytical sub model can explain how a certain pattern, based on that investors form their beliefs, can causes both underreaction and overreaction in different phases when event come. Additionally, our analytical sub model can explain some other anomalies and predicts two new anomalies that need to be tested by empirical analysis.In the part of dynamic model, we introduce and extend minority game, and then build an agent-based artificial market. In the extended new model, agents are more intelligent, more adaptive and more similar to the investors in real market. So m...