Switching by agents between two trading behaviors and the stylized facts of financial markets.
Résumé
I propose an agent-based model of a single-asset financial market, described in terms of a small number of parameters. I show that switching by agents between two trading behaviors (informed vs. liquidity traders) leads to a market price that fluctuates endlessly and a volatility that displays a mean-reverting behavior. This agent-based model generically leads to price returns having statistical properties similar to the stylized facts observed in financial time series: an absence of autocorrelation in returns, stochastic volatility, excess volatility, volatility clustering that is not attributable to the external signal. The model's parsimonious structure allows the identification of the mechanism leading to these effects. I investigate some properties of this model theoretically and present analytical results.