An Artiicial Stock Market

The Santa Fe Arti cial Stock Market consists of a central computational market and a number of arti cially intelligent agents The agents choose be tween investing in a stock and leaving their money in the bank which pays a xed interest rate The stock pays a stochastic dividend and has a price which uc tuates according to agent demand The agents make their investment decisions by attempting to forecast the future return on the stock using genetic algo rithms to generate test and evolve predictive rules The arti cial market shows two distinct regimes of behavior depending on parameter settings and initial conditions One regime corresponds to the theoretically predicted rational expectations behavior with low overall trading volume uncorrelated price se ries and no possibility of technical trading The other regime is more complex and corresponds to realistic market behavior with high trading volume high inter mittent volatility including GARCH behavior bub bles and crashes and the presence of technical trading One parameter that can be used to control the regime is the exploration rate which governs how rapidly the agents explore new hypothesis with their genetic al gorithms At low exploration rate the market settles into the rational expectations equilibrium At high ex ploration rate it falls into the more realistic complex regime The transition is fairly sharp but close to the boundary the outcome depends on the agents initial beliefs if they believe in rational expectations it occurs and is a local attractor otherwise the market evolves into the complex regime