Simulation And Empirical Study Of Price Evolution In Financial Markets Based On Minority Game

Analysis of asset prices in financial markets has been a key point in financialtheory innovation and empirical research. In financial markets, traders buying or sellingassets can be regarded as the reflection of the changes in asset prices, and the buying orselling behavior will affect asset price further. When adding up all traders buying orselling behaviors, it will determine a new price of the asset. As a result, there exist apersistence interaction process between changes in asset prices and traders’ transactionbehavior, forming the evolution mechanism of asset prices in financial markets.As an important model to analyze the evolution mechanism of financial assetprices from a micro level, the minority game model, based on financial assumption withlimited rational behavior of investors, better captures the essential characteristics ofbenefiting minority in economy and ecological system, and constructs a highlysimplified complex adaptive system in a more concise way. The minority game modelprovides us with a simple and effective way to simulate financial market price (such asprice fluctuations, income distribution peak and fat tail,volatility cluster), and makes anmore deeply objective analysis on common financial phenomenon(price fluctuations,income distribution, financial market bubble, the influence of the financial market to thenational economy, etc.) in financial market.Based on the former research extension of the minority Game model-WG (WealthGame) model, we make a simulation on the price evolution in financial markets fromthe aspect of investors with loss aversion and different strategies to investigate theinfluence on the asset prices evolution after considering the two factors. Through thenumerical simulation results show that the WG model can well simulate the evolution ofreal asset prices in financial market and market characteristics, in the different marketenvironment, the existence of loss aversion investors and investors have differentstrategies has different impact on the volatility of the market, the predictability of themarket and market returns: when the market excess demand (or supply) impact on assetprices are relatively low, the validity of the simulation of the financial market is low,close to the real market, the existence of loss aversion investor can improve marketearnings, reduce market volatility, so as to improve the quality of the market. On thecontrary, the number of investor’s strategy increase market speculative atmosphere,market volatility is larger, and it is not conducive to the quality of the whole market. Wehope this conclusion can bring certain inspiration on regulators by making a effective financial market regulation, maintain the stability of the financial market, and formulaterelated policies and measures; When the market excess demand or supply stronglyimpact on the asset market price, at this time market efficiency is higher, and theexistence of loss aversion investors and investors have different strategies have littleimpact on the market. We verified by the WG model the more the price history in thememory and can’t make it to obtain high yield in the market. We hope that throughinvestor’s psychology and behavior aspects, we can do some exploring research on thefinancial market price evolution simulation based on the minority game model.Further, we study the predictability of China’s stock market index fluctuation basedon symbol sequence method, the results show that China’s Shanghai and shenzhen stockmarkets are not weak form efficient, stock price fluctuations in the stock market is notcompletely random, the price of the stock market is predictable, at least short-term canpredict. Based on this, we make WG model as an investor in the real stock market indexand individual stocks trading tool, by choosing the Hang Seng Index, the Shanghaicomposite index and the SP500index stock market index, Coca-Cola, Vanke as thesample data, through the empirical study found that the WG model can adapt todifferent market environment, investors can grasp the changing rule of the real stockprice fluctuations in the stock market, makes the the proportion of the profited investorswho traded using the model is significantly higher than random selection. This showthat the model’s effectiveness of the decision problem in the stock trading in financialmarkets.Finally, we put the WG model with other Game model to do empirical comparison,the results found that whether investors have fixed stock position limits or investors onthe basis of the wealth of stock position limits, investors hold strategy number S andrisk aversion factor R doesn’t has a obvious impact on the average revenue and the bestbenefit of investors, and make a difference due to different market index and individualstocks. Compared with other models, WG model embodies its good adaptability in thisarticle, the change of investor benefits reproduce the market movements, and beat themarket to a certain extent. But this relatively conservative strategy, at the same time,also make it can’t get higher earnings during the period of risk. Through empiricalresearch, we has made some attempt by putting the minority game model to the realapplication in financial markets in this article.