PUBLICATIONS
Distribution of the Diagonal Entries of the Resolvent of a Complex Ginibre Matrix
arXiv preprint
2 décembre 2024
Pierre Bousseyroux, Jean-Philippe Bouchaud, Marc Potters
The study of eigenvalue distributions in random matrix theory is often conducted by analyzing the resolvent matrix GNM(z)=(z1−M)−1. The normalized trace of the resolvent, known as the Stieltjes transform 𝔤NM(z), converges to a limit 𝔤M(z) as the matrix dimension N grows, which provides the eigenvalue density ρM in the large-N limit. In the Hermitian case, the distribution of 𝔤NM(z), now regarded as a random variable, is explicitly known when z lies within the limiting spectrum, and it coincides with the distribution of any diagonal entry of GNM(z).
In this paper, we investigate what becomes of these results when M is non-Hermitian. Our main result is the exact computation of the diagonal elements of GNM(z) when M is a Ginibre matrix of size N, as well as the high-dimensional limit for different regimes of z, revealing a tail behavior connected to the statistics of the left and right eigenvectors. Interestingly, the limit distribution is stable under inversion, a property previously observed in the symmetric case. We then propose two general conjectures regarding the distribution of the diagonal elements of the resolvent and its normalized trace in the non-Hermitian case, both of which reveal a symmetry under inversion.
Topics:
Methods:
Random Matrix Theory
Random Matrix Theory
Revisiting elastic string models of forward interest rates
Quantitative Finance
25 novembre 2024
Victor Le Coz, Jean-Philippe Bouchaud
Twenty five years ago, several authors proposed to describe the forward interest rate curve (FRC) as an elastic string along which idiosyncratic shocks propagate, accounting for the peculiar structure of the return correlation across different maturities. In this paper, we revisit the specific ‘stiff’ elastic string field theory of Baaquie and Bouchaud [Stiff field theory of interest rates and psychological future time. Wilmott Mag., 2004, 2–6] in a way that makes its micro-foundation more transparent. Our model can be interpreted as capturing the effect of market forces that set the rates of nearby tenors in a self-referential fashion. The model is parsimonious and accurately reproduces the whole correlation structure of the FRC over the time period 1994–2023, with an error around 1% and with only one adjustable parameter, the value of which being very stable across the last three decades. The dependence of correlation on time resolution (also called the Epps effect) is also faithfully reproduced within the model and leads to a cross-tenor information propagation time on the order of 30 minutes. Finally, we confirm that the perceived time in interest rate markets is a strongly sub-linear function of real time, as surmised by Baaquie and Bouchaud [Stiff field theory of interest rates and psychological future time. Wilmott Mag., 2004, 2–6]. In fact, our results are fully compatible with hyperbolic discounting, in line with the recent behavioral Finance literature Farmer and Geanakoplos [Hyperbolic Discounting is Rational: Valuing the Far Future with Uncertain Discount Rates, Cowles Foundation Discussion Papers, 2009 (Cowles Foundation for Research in Economics, Yale University)].
Topics:
Methods:
Financial Time-series
Numerical Simulation, Stochastic Processes, Dynamical Systems Theory
How does liquidity shape the yield curve?
arXiv preprint
25 novembre 2024
Victor Le Coz, Jean-Philippe Bouchaud, Iacopo Mastromatteo
The phenomenology of the forward rate curve (FRC) can be accurately understood by the fluctuations of a stiff elastic string (Le Coz and Bouchaud, 2024). By relating the exogenous shocks driving such fluctuations to the surprises in the order flows, we elevate the model from purely describing price variations to a microstructural model that incorporates the joint dynamics of prices and order flows, accounting for both impact and cross-impact effects. Remarkably, this framework allows for at least the same explanatory power as existing cross-impact models, while using significantly fewer parameters. In addition, our model generates liquidity-dependent correlations between the forward rate of one tenor and the order flow of another, consistent with recent empirical findings. We show that the model also account for the non-martingale behavior of prices at short timescales.
Topics:
Methods:
Financial Time-series, Market Microstructure
Numerical Simulation, Stochastic Processes, Empirical Analysis
Kendall Correlation Coefficients for Portfolio Optimization
arXiv preprint
22 octobre 2024
Tomas Espana, Victor Le Coz, Matteo Smerlak
Markowitz's optimal portfolio relies on the accurate estimation of correlations between asset returns, a difficult problem when the number of observations is not much larger than the number of assets. Using powerful results from random matrix theory, several schemes have been developed to "clean" the eigenvalues of empirical correlation matrices. By contrast, the (in practice equally important) problem of correctly estimating the eigenvectors of the correlation matrix has received comparatively little attention. Here we discuss a class of correlation estimators generalizing Kendall's rank correlation coefficient which improve the estimation of both eigenvalues and eigenvectors in data-poor regimes. Using both synthetic and real financial data, we show that these generalized correlation coefficients yield Markowitz portfolios with lower out-of-sample risk than those obtained with rotationally invariant estimators. Central to these results is a property shared by all Kendall-like estimators but not with classical correlation coefficients: zero eigenvalues only appear when the number of assets becomes proportional to the square of the number of data points.
Topics:
Methods:
Financial Time-series
Empirical Analysis, Random Matrix Theory
A minimal model of money creation under regulatory constraints
arXiv preprint
22 octobre 2024
Victor Le Coz, Michael Benzaquen, Damien Challet
We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the appearance of evergreen repurchase agreements and collateral re-use emerges as a simple answer to banks' counterparty risk and liquidity ratio regulation. In line with prevailing theories, re-use increases with collateral scarcity. In our agent-based model, banks create money endogenously to meet the funding requests of economic agents. The latter generate payment shocks to the banking system by reallocating their deposits. Banks absorbs these shocks thanks to repurchase agreements, while respecting reserves, liquidity, and leverage constraints. The resulting network is denser and more robust to stress scenarios than an unsecured one; in addition, the stable bank trading relationships network exhibits a core-periphery structure. Finally, we show how this model can be used as a tool for stress testing and monetary policy design.
Topics:
Methods:
Economic Networks
Agent-based Modelling, Numerical Simulation
Stylized facts in money markets: an empirical analysis of the eurozone data
arXiv preprint
21 octobre 2024
Victor Le Coz, Damien Challet, Michael Benzaquen, Nolwenn Allaire
Using the secured transactions recorded within the Money Markets Statistical Reporting database of the European Central Bank, we test several stylized facts regarding interbank market of the 47 largest banks in the eurozone. We observe that the surge in the volume of traded evergreen repurchase agreements followed the introduction of the LCR regulation and we measure a rate of collateral re-use consistent with the literature. Regarding the topology of the interbank network, we confirm the high level of network stability but observe a higher density and a higher in- and out-degree symmetry than what is reported for unsecured markets.
Topics:
Methods:
Financial Time-series
Empirical Analysis
Unraveling Financial Market Quakes: Exploring Endogenous Volatility
Dynamics in Interconnected Markets
PhD Thesis
18 octobre 2024
Cecilia Aubrun
This thesis presents both a data-driven approach and a theoretical approach to investigate the endogenous nature of price movements within a multivariate framework. Our data-driven approach aims to characterize empirical price jumps. Leveraging interdisciplinary research suggesting that the time-asymmetry of activity can be used to classify bursts of activity as exogenous or endoge- nous, we develop a new unsupervised method based on wavelet coefficients (particularly suitable to reflect time asymmetry) to measure reflexivity of univariate price jumps. On top of that, our wavelet-based representation revealed that mean-reversion and trend are two additional key fea- tures, permitting identification of new classes of jumps. Furthermore, this representation allows to investigate the reflexive properties of co-jumps, defined by multiple stocks experiencing price jumps within the same minute. We argue that a significant fraction of co-jumps results from an endogenous contagion mechanism. Thus, May 6th event was not an isolated incident, and the interplay of endogenous dynamics alongside high levels of interconnectedness contributes to the instabilities observed within markets.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Financial Time-series, Market Microstructure
Empirical Analysis, Numerical Simulation, Stochastic Processes
The Prince and the Pauper and the Physics: A statistical mechanics approach to understanding economic inequalities
PhD Thesis
15 octobre 2024
Nirbhay Patil
Topics:
Methods:
Economic Networks, Social Dynamics, Wealth & Income Inequality
Numerical Simulation, Random Matrix Theory, Empirical Analysis, Statistical Mechanics
Mitigating Farmland Biodiversity Loss
A Bio-Economic Model of Land Consolidation and Pesticide Use
SSRN Preprint
29 juillet 2024
Elia Moretti, Michael Benzaquen
Biodiversity loss driven by agricultural intensification is a pressing global issue, with significant implications for ecosystem stability and human well-being. We design an integrated bio-economic agent-based model, informed by historical data from the French agricultural sector, to project future biodiversity trends and evaluate policy interventions. Our model predicts further biodiversity decline under a business-as-usual scenario, primarily due to intensified land consolidation. We evaluate two policy options: reducing pesticide use and subsidizing small farmers. While pesticide reduction rapidly benefits biodiversity in the beginning, it eventually leads to increased land consolidation and further biodiversity loss. In contrast, subsidizing small farmers by reallocating a small fraction of existing subsidies, stabilizes farm sizes and enhances biodiversity in the long run. The most effective strategy results from combining both policies, leveraging pesticide reduction alongside targeted subsidies to balance economic pressures and consistently improve biodiversity.
Topics:
Methods:
Sustainability
Agent-based Modelling
Bottlenecks in Occupational Transitions: A Data-driven Taxonomy
SSRN Preprint
18 juillet 2024
Max Sina Knicker, Karl Naumann-Woleske, Michael Benzaquen
In an era of rapid technological advancements and macroeconomic shifts, worker reallocation is necessary, yet responses to labor market shocks remain sluggish, making it crucial to identify bottlenecks in occupational transitions to understand labor market dynamics and improve mobility. In this study, we analyze French occupational data to uncover patterns of worker mobility and pinpoint specific occupations that act as bottlenecks which impede rapid reallocation. We introduce two metrics, transferability and accessibility, to quantify the diversity of occupational transitions and find that bottlenecks can be explained by a condensation effect of occupations with high accessibility but low transferability. Transferability measures the variety of transitions from an occupation to others, while accessibility assesses the variety of transitions into an occupation. We provide a comprehensive framework for analyzing occupational complexity and mobility patterns, offering insights into potential barriers and pathways for efficient retraining programs. We argue that our approach can inform policymakers and stakeholders aiming to enhance labor market efficiency and support workforce adaptability.
Topics:
Methods:
Economic Networks, Social Dynamics
Empirical Analysis
On the relative packing densities of pistachios and pistachio shells
arXiv preprint
27 juin 2024
Ruben Zakine, Michael Benzaquen
Given an appetizer bowl full of N pistachios, what is the optimal size of the container -- neither too small, nor too big -- needed for accommodating the resulting 2N non-edible pistachio shells? Performing a simple experiment we find that, provided the shells are densely packed, such container needs only be slightly more than half (≈0.57) that of the original pistachio bowl. If loosely packed this number increases to ≈0.73. Our results are discussed in light of existing literature on packing ellipsoids and spherical caps.
Topics:
Methods:
Popular Physics
Experimental Physics, Statistical Mechanics
"Microstructure Modes" -- Disentangling the Joint Dynamics of Prices & Order Flow
arXiv preprint
16 mai 2024
Salma Elomari-Kessab, Guillaume Matrier, Julius Bonart, Jean-Philippe Bouchaud
Understanding the micro-dynamics of asset prices in modern electronic order books is crucial for investors and regulators. In this paper, we use an order by order Eurostoxx database spanning over 3 years to analyze the joint dynamics of prices and order flow. In order to alleviate various problems caused by high-frequency noise, we propose a double coarse-graining procedure that allows us to extract meaningful information at the minute time scale. We use Principal Component Analysis to construct "microstructure modes" that describe the most common flow/return patterns and allow one to separate them into bid-ask symmetric and bid-ask anti-symmetric. We define and calibrate a Vector Auto-Regressive (VAR) model that encodes the dynamical evolution of these modes. The parameters of the VAR model are found to be extremely stable in time, and lead to relatively high R2 prediction scores, especially for symmetric liquidity modes. The VAR model becomes marginally unstable as more lags are included, reflecting the long-memory nature of flows and giving some further credence to the possibility of "endogenous liquidity crises". Although very satisfactory on several counts, we show that our VAR framework does not account for the well known square-root law of price impact.
Topics:
Methods:
Financial Time-series, Market Microstructure
Empirical Analysis
Riding Wavelets: A Method to Discover New Classes of Price Jumps
arXiv preprint
24 avril 2024
Cecilia Aubrun, Rudy Morel, Michael Benzaquen, Jean-Philippe Bouchaud
Cascades of events and extreme occurrences have garnered significant attention across diverse domains such as financial markets, seismology, and social physics. Such events can stem either from the internal dynamics inherent to the system (endogenous), or from external shocks (exogenous). The possibility of separating these two classes of events has critical implications for professionals in those fields. We introduce an unsupervised framework leveraging a representation of jump time-series based on wavelet coefficients and apply it to stock price jumps. In line with previous work, we recover the fact that the time-asymmetry of volatility is a major feature. Mean-reversion and trend are found to be two additional key features, allowing us to identify new classes of jumps. Furthermore, thanks to our wavelet-based representation, we investigate the reflexive properties of co-jumps, which occur when multiple stocks experience price jumps within the same minute. We argue that a significant fraction of co-jumps results from an endogenous contagion mechanism.
Topics:
Methods:
Financial Time-series, Market Microstructure, Endogenous Crises & Emergent Phenomena
Empirical Analysis, Stochastic Processes
Heterogeneous mean-field analysis of the generalized Lotka-Volterra model on a network
arXiv preprint
17 avril 2024
Fabián Aguirre-López
We study the dynamics of the generalized Lotka-Volterra model with a network structure. Performing a high connectivity expansion for graphs, we write down a mean-field dynamical theory that incorporates degree heterogeneity. This allows us to describe the fixed points of the model in terms of a few simple order parameters. We extend the analysis even for diverging abundances, using a mapping to the replicator model. With this we present a unified approach for both cooperative and competitive systems that display complementary behaviors. In particular we show the central role of an order parameter called the critical degree, gc. In the competitive regime gc serves to distinguish high degree nodes that are more likely to go extinct, while in the cooperative regime it has the reverse role, it will determine the low degree nodes that tend to go relatively extinct.
Topics:
Methods:
Social Dynamics, Economic Networks
Dynamical Systems Theory, Numerical Simulation, Random Matrix Theory
Spectral Initialization for High-Dimensional Phase Retrieval with Biased Spatial Directions
arXiv preprint
22 mars 2024
Pierre Bousseyroux, Marc Potters
We explore a spectral initialization method that plays a central role in contemporary research on signal estimation in nonconvex scenarios. In a noiseless phase retrieval framework, we precisely analyze the method's performance in the high-dimensional limit when sensing vectors follow a multivariate Gaussian distribution for two rotationally invariant models of the covariance matrix C. In the first model C is a projector on a lower dimensional space while in the second it is a Wishart matrix. Our analytical results extend the well-established case when C is the identity matrix. Our examination shows that the introduction of biased spatial directions leads to a substantial improvement in the spectral method's effectiveness, particularly when the number of measurements is less than the signal's dimension. This extension also consistently reveals a phase transition phenomenon dependent on the ratio between sample size and signal dimension. Surprisingly, both of these models share the same threshold value.
Topics:
Methods:
Random Matrix Theory
Random Matrix Theory
Scenario Discovery in a Complex Economy
PhD Thesis
5 mars 2024
Karl Naumann-Woleske
The economy, characterized by non-linearity, adaptability, and non-equilibrium dynamics, exhibits emer- gent phenomena, such as crises and inequalities, shaped by agents’ reactions and policy interventions. Agent- based Modeling (ABM) is a recent modeling approach in macroeconomics that generates these phenomena from the ground up by simulating a multiplicity of heteroge- neous interacting agents. While this method can gener- ate emergent phenomena, it has often been critiqued as a black-box where causal mechanisms are unclear and there too vast set of generated dynamics. This thesis pro- poses a method to approach the fundamental question: What is the set of qualitatively different phenomena can an Macroeconomic Agent-based Model (MABM) generate, and what governs their transitions?
Drawing on research in biophysics, the core idea posits that there are only a few critical parameter combinations that govern a specific outcome. Exploiting these with a gradient ascent algorithm, one can effectively uncover the set of different phenomena a MABM can recover. The significance of this approach lies in revealing a simpler structure beneath MABM complexity, paving the way for effective policies that address critical parameter directions. It also suggests that despite the complexity of an MABM and the high number of parameters, fitting these models requires only fitting critical directions to have predictive power.
The first part of this thesis develops the methods behind the algorithm, highlighting its power on Kirman’s Ants, a simple model of agent-herding. The algorithm is then demonstrated on the stylized Mark-0 MABM that has a rich phenomenology with a known set of phenomena. I show how we can recover this set of phenomena despite the complexity of the model’s dynamics. The final part of this thesis actually adopts a reverse approach, em- bedding intra-agent interactions in equilibrium macroeco- nomic models, unveiling emergent phases and endoge- nous crises in these models. In its essence, this thesis navigates the intricate terrain of ABMs, unraveling their po- tential in generating different scenarios that can be used to inform policy decisions in dynamically complex systems.
Topics:
Methods:
Social Dynamics, Endogenous Crises & Emergent Phenomena, Learning & Adaptive Behaviors
Stochastic Processes, Statistical Mechanics, Dynamical Systems Theory, Numerical Simulation, Agent-based Modelling
Random features and polynomial rules
arXiv preprint
15 février 2024
Fabián Aguirre-López, Silvio Franz, Mauro Pastore
Random features models play a distinguished role in the theory of deep learning, describing the behavior of neural networks close to their infinite-width limit. In this work, we present a thorough analysis of the generalization performance of random features models for generic supervised learning problems with Gaussian data. Our approach, built with tools from the statistical mechanics of disordered systems, maps the random features model to an equivalent polynomial model, and allows us to plot average generalization curves as functions of the two main control parameters of the problem: the number of random features N and the size P of the training set, both assumed to scale as powers in the input dimension D. Our results extend the case of proportional scaling between N, P and D. They are in accordance with rigorous bounds known for certain particular learning tasks and are in quantitative agreement with numerical experiments performed over many order of magnitudes of N and P. We find good agreement also far from the asymptotic limits where D→∞ and at least one between P/DK, N/DL remains finite.
Topics:
Methods:
Statistical Mechanics
When Is Cross Impact Relevant?
Quantitative Finance
6 février 2024
Victor Le Coz, Iacopo Mastromatteo, Damien Challet, Michael Benzaquen
Trading pressure from one asset can move the price of another, a phenomenon referred to as cross impact. Using tick-by-tick data spanning 5 years for 500 assets listed in the United States, we identify the features that make cross-impact relevant to explain the variance of price returns. We show that price formation occurs endogenously within highly liquid assets. Then, trades in these assets influence the prices of less liquid correlated products, with an impact velocity constrained by their minimum trading frequency. We investigate the implications of such a multidimensional price formation mechanism on interest rate markets. We find that the 10-year bond future serves as the primary liquidity reservoir, influencing the prices of cash bonds and futures contracts within the interest rate curve. Such behaviour challenges the validity of the theory in Financial Economics that regards long-term rates as agents anticipations of future short term rates.
Topics:
Methods:
Risk Management, Market Microstructure
Empirical Analysis, Numerical Simulation, Stochastic Processes
Bringing together two paradigms of non-equilibrium: Driven dynamics of aging systems
arXiv preprint
5 février 2024
Diego Tapias, Charles Marteau, Fabián Aguirre-López, Peter Sollich
There are two fundamental paradigms for non-equilibrium dynamics: on the one hand, aging towards an equilibrium state that cannot be reached on reasonable timescales; on the other, external driving that can lead to non-equilibrium steady states. We explore how these two mechanisms interact, by studying the behaviour of trap models, which are paradigmatic descriptions of slow glassy dynamics, when driven by trajectory bias towards high or low activity. To diagnose whether the driven systems continue to age, we establish a framework for mapping the biased dynamics to a Markovian time evolution with time-dependent transition rates. We find that the original aging dynamics reacts in two qualitatively distinct ways to the driving: it can be destroyed by driving of any nonzero strength (fragile aging), whereby the dynamics either reaches an active steady state or effectively freezes; or it can persist within a finite range of driving strengths around the undriven case (robust aging). This classification into fragile and robust aging could form the basis for distinguishing different universality classes of aging dynamics.
Topics:
Methods:
Learning & Adaptive Behaviors
Statistical Mechanics, Stochastic Processes
Post-COVID Inflation & the Monetary Policy Dilemma: An Agent-Based Scenario Analysis
arXiv preprint
15 janvier 2024
Max Sina Knicker, Karl Naumann-Woleske, J-P Bouchaud, Francesco Zamponi
The economic shocks that followed the COVID-19 pandemic have brought to light the difficulty, both for academics and policy makers, of describing and predicting the dynamics of inflation. This paper offers an alternative modelling approach. We study the 2020-2023 period within the well-studied Mark-0 Agent-Based Model, in which economic agents act and react according to plausible behavioural rules. We include a mechanism through which trust of economic agents in the Central Bank can de-anchor. We investigate the influence of regulatory policies on inflationary dynamics resulting from three exogenous shocks, calibrated on those that followed the COVID-19 pandemic: a production/consumption shock due to COVID-related lockdowns, a supply-chain shock, and an energy price shock exacerbated by the Russian invasion of Ukraine. By exploring the impact of these shocks under different assumptions about monetary policy efficacy and transmission channels, we review various explanations for the resurgence of inflation in the United States, including demand-pull, cost-push, and profit-driven factors. Our main results are four-fold: (i) without appropriate fiscal policy, the shocked economy can take years to recover, or even tip over into a deep recession; {(ii) the success of monetary policy in curbing inflation is primarily due to expectation anchoring, rather than to the direct economic impact of interest rate hikes; (iii) however, strong inflation anchoring is detrimental to consumption and unemployment, leading to a narrow window of ``optimal'' policy responses due to the trade-off between inflation and unemployment;} (iv) the two most sensitive model parameters are those describing wage and price indexation. The results of our study have implications for Central Bank decision-making, and offers an easy-to-use tool that may help anticipate the consequences of different monetary and fiscal policies.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Learning & Adaptive Behaviors
Agent-based Modelling, Numerical Simulation
The Stability Matrix Spectrum of Large Ecological and Economical Systems
arXiv preprint
27 décembre 2023
Nirbhay Patil, Fabián Aguirre-López, J-P Bouchaud
Economic and ecological models can be extremely complex, with a large number of agents/species
each featuring multiple dynamical quantities. In an attempt to understand the generic stability
properties of such systems, we define and study an interesting new matrix ensemble with extensive
correlations. We find analytically the boundary of its eigenvalue spectrum in the complex plane, as
a function of the correlations determined by the model at hand. We solve numerically our equations
in several cases of interest, and show that the resulting spectra can take a surprisingly wide variety
of shapes.
Topics:
Methods:
Social Dynamics
Numerical Simulation, Random Matrix Theory
Unlearnable Games and “Satisficing” Decisions: A Simple Model for a Complex World
arXiv preprint
25 décembre 2023
Jerome Garnier-Brun, Michael Benzaquen, J-P Bouchaud
As a schematic model of the complexity economic agents are confronted with, we introduce the
“SK-game”, a discrete time binary choice model inspired from mean-field spin-glasses. We show that
even in a completely static environment, agents are unable to learn collectively-optimal strategies.
This is either because the learning process gets trapped in a sub-optimal fixed point, or because
learning never converges and leads to a never ending evolution of agents intentions. Contrarily to
the hope that learning might save the standard “rational expectation” framework in economics,
we argue that complex situations are generically unlearnable and agents must do with satisficing
solutions, as argued long ago by Herbert Simon. Only a centralized, omniscient agent endowed
with enormous computing power could qualify to determine the optimal strategy of all agents.
Using a mix of analytical arguments and numerical simulations, we find that (i) long memory of
past rewards is beneficial to learning whereas over-reaction to recent past is detrimental and leads
to cycles or chaos; (ii) increased competition destabilizes fixed points and leads first to chaos and, in
the high competition limit, to quasi-cycles; (iii) some amount of randomness in the learning process,
perhaps paradoxically, allows the system to reach better collective decisions; (iv) non-stationary,
“aging” behaviour spontaneously emerge in a large swath of parameter space of our complex but
static world. On the positive side, we find that the learning process allows cooperative systems to
coordinate around satisficing solutions with rather high (but markedly sub-optimal) average reward.
However, hyper-sensitivity to the game parameters makes it impossible to predict ex ante who will
be better or worse off in our stylized economy.
Topics:
Methods:
Social Dynamics, Learning & Adaptive Behaviors
Statistical Mechanics, Information Theory, Dynamical Systems Theory, Random Matrix Theory
Navigating radical complexity: the influence of disorder, nonrelaxational dynamics and learning on aggregate coordination
PhD Thesis
8 décembre 2023
Jerome Garnier-Brun
This thesis explores aggregate coordination in complex systems, challenging the traditional "homo economicus" paradigm of classical economics. Contrary to the assumption of a unique optimal state in rational decision-making, spin-glasses reveal the emergence of numerous solutions in the presence of heterogeneous interactions. The study begins by examining radical complexity in the socioeconomic context, demonstrating the sensitivity of outcomes to problem parameters. Applying these findings to ecological equilibria, the thesis introduces boundedly rational decision-making in modeling individual agents and explores the limitations of equilibrium statistical mechanics. A game inspired by the Sherrington-Kirkpatrick spin-glass incorporates bounded rationality, non-reciprocal interactions, and learning, revealing dynamic phenomena. The thesis concludes with an analysis of disorder-free out-of-equilibrium systems, including a Schelling-like occupation model and the influence of out-of-equilibrium forcing on relaxation towards steady-states. The goal is to understand the robustness of collective phenomena to various decision rules in complex systems.
Topics:
Methods:
Social Dynamics, Learning & Adaptive Behaviors
Statistical Mechanics, Dynamical Systems Theory, Random Matrix Theory
Turbulent approaches to image analysis and statistical fractography
PhD Thesis
28 novembre 2023
Samy Lakhal
In this thesis, we apply tools inherited from the study of complex systems to image processing and fractography. In the case of image processing, we define and apply fluctuation-based metrics to tackle visual quality assessment, image statistics and color quantization. In fractography, the correlation analysis of fracture surfaces --obtained after the complete failure of a material-- reveals universal statistical resembling fluid turbulence velocity fields. Our analysis suggests that fracture surfaces are the result of collective damage coalescence mechanisms, responsible for their non-trivial topography.
Topics:
Methods:
Image Processing
Statistical Mechanics, Stochastic Processes, Random Matrix Theory
Trading with Concave Price Impact and Impact Decay - Theory and Evidence
SSRN Preprint
6 novembre 2023
Natasha Hey, Iacopo Mastromatteo, Johannes Muhle-Karbe, Kevin Webster
We study statistical arbitrage problems accounting for the nonlinear and transient price impact of metaorders observed empirically. We show that simple explicit trading rules can be derived even for general nonparametric alpha and liquidity signals, and also discuss extensions to several impact decay timescales. These results are illustrated using a proprietary dataset of CFM metaorders, which allows us to calibrate the levels, concavity, and decay parameters of the price impact model and analyze their effects on optimal trading.
Topics:
Methods:
Financial Time-series, Market Microstructure
Empirical Analysis, Stochastic Processes
Wrapping and unwrapping multifractal fields
arXiv preprint
5 octobre 2023
Samy Lakhal, Laurent Ponson, Michael Benzaquen, J-P Bouchaud
We develop a powerful yet simple method that generates multifractal fields with fully controlled scaling properties. Adopting the Multifractal Random Walk (MRW) model of Bacry et al. (2001), synthetic multifractal fields are obtained from the fractional integration of non-Gaussian fluctuations, built by a non-linear transformation of log-correlated Gaussian fields. The resulting fields are parameterized by their roughness exponent H, intermittency λ and multifractal range ξω. We retrieve all the salient features of the MRW, namely a quadratic scaling exponent spectrum ζq, fat-tail statistics of fluctuations, and spatial correlations of local volatility. Such features can be finely tuned, allowing for the generation of ideal multifractals mimicking real multi-affine fields. The construction procedure is then used the other way around to unwrap experimental data -- here the roughness map of a fractured metallic alloy. Our analysis evidences subtle differences with synthetic fields, namely anisotropic filamental clusters reminiscent of dissipation structures found in fluid turbulence.
Topics:
Methods:
Information Theory, Deep Learning & Natural Language Processing, Numerical Simulation
Socioeconomic Agents As Active Matter in Nonequilibrium Sakoda-Schelling Models
SSRN Preprint
26 juillet 2023
Ruben Zakine, Jerome Garnier-Brun, Antoine-Cyrus Becharat, Michael Benzaquen
How robust are socioeconomic agent-based models with respect to the details of the agents' decision rule? We tackle this question by considering an occupation model in the spirit of the Sakoda-Schelling model, historically introduced to shed light on segregation dynamics among human groups. For a large class of utility functions and decision rules, we pinpoint the nonequilibrium nature of the agent dynamics, while recovering the equilibrium-like phase separation phenomenology. Within the mean field approximation we show how the model can be mapped, to some extent, onto an active matter field description (Active Model B). Finally, we consider non-reciprocal interactions between two populations, and show how they can lead to non-steady macroscopic behavior. We believe our approach provides a unifying framework to further study geography-dependent agent-based models, notably paving the way for joint consideration of population and price dynamics within a field theoretic approach.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Social Dynamics
Statistical Mechanics, Dynamical Systems Theory, Numerical Simulation
The Cost of Misspecifying Price Impact
SSRN Preprint
31 mai 2023
Natasha Hey, J-P Bouchaud, Iacopo Mastromatteo, Johannes Muhle-Karbe, Kevin Webster
Portfolio managers’ orders trade off return and trading cost predictions. Return predictions rely on alpha models, whereas price impact models quantify trading costs. This paper studies what happens when trades are based on an incorrect price impact model, so that the portfolio either over- or under-trades its alpha signal. We derive tractable formulas for these misspecification costs and illustrate them on proprietary trading data. The misspecification costs are naturally asymmetric: underestimating impact concavity or impact decay shrinks profits, but overestimating concavity or impact decay can even turn profits into losses.
Topics:
Methods:
Market Microstructure, Risk Management
Numerical Simulation, Stochastic Processes
Income Inequalities Increase with City Size: Evidence from French Data
arXiv preprint
22 mai 2023
Nirbhay Patil, Jean-Pierre Nadal, J-P Bouchaud
We analyse the income distributions of cities in France and the scaling of the income of different deciles as a function of the population. We find a significant difference in the scaling exponents for the richer and poorer parts of the population, implying an unequivocal rise in inequalities in larger cities, made worse by living costs that are disproportionately higher for the poor. We find that the distribution of revenues of cities in France has a universal, Gumbel-like form, with mean and variance growing with the logarithm of population. We show how this result directly implies different income scaling exponents as a function of decile. We also study the spatial correlations of income and population, which decay exponentially with distance. We find that large cities are not more income-segregated than small cities. Finally, we search for couplings between social and economic factors, like age and income, and propose a toy model that reproduces some of our observations.
Topics:
Methods:
Wealth & Income Inequality
Empirical Analysis
Multiscale Relevance of Natural Images
arXiv preprint
22 mars 2023
Samy Lakhal, Alexandre Darmon, Iacopo Mastromatteo, Matteo Marsili, Michael Benzaquen
We use an agnostic information-theoretic approach to investigate the statistical properties of natural images. We introduce the Multiscale Relevance (MSR) measure to assess the robustness of images to compression at all scales. Starting in a controlled environment, we characterize the MSR of synthetic random textures as function of image roughness H and other relevant parameters. We then extend the analysis to natural images and find striking similarities with critical (H = 0) random textures. We show that the MSR is more robust and informative of image content than classical methods such as power spectrum analysis. Finally, we confront the MSR to classical measures for the calibration of common procedures such as color mapping and denoising. Overall, the MSR approach appears to be a good candidate for advanced image analysis and image processing, while providing a good level of physical interpretability.
Topics:
Methods:
Image Processing
Deep Learning & Natural Language Processing, Information Theory, Empirical Analysis
Agent-based Integrated Assessment Models: Alternative Foundations to the Environment-Energy-Economics Nexus
arXiv preprint
20 janvier 2023
Karl Naumann-Woleske
Climate change is a major global challenge today. To assess how policies may lead to mitigation, economists have developed Integrated Assessment Models, however, most of the equilibrium based models have faced heavy critiques. Agent-based models have recently come to the fore as an alternative macroeconomic modeling framework. In this paper, four Agent-based Integrated Assessment Models linking environment, energy and economy are reviewed. These models have several advantages over existing models in terms of their heterogeneous agents, the allocation of damages amongst the individual agents, representation of the financial system, and policy mixes. While Agent-based Integrated Assessment Models have made strong advances, there are several avenues into which research should be continued, including incorporation of natural resources and spatial dynamics, closer analysis of distributional effects and feedbacks, and multi-sectoral firm network structures.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Wealth & Income Inequality, Economic Networks, Learning & Adaptive Behaviors
Agent-based Modelling, Numerical Simulation, Empirical Analysis
Microfounded Theories of Price Formation
PhD Thesis
18 novembre 2022
Michele Vodret
Price and volume dynamics in financial markets exhibit empirical regularities, called stylized facts. Statistical models capture the interplay between these stylized facts and are widely used to make quantitative predictions, but they do not explain why prices move in the first place. Microfounded models instead let the price dynamics emerge from the interactions between traders’ strategies. The aim of this thesis is to partially bridge the gap between the literature on microfounded and statistical models. In particular, we explore how the predictions of a well-known microfounded model change if we relax some of its unrealistic assumptions. Interestingly, in doing so, we obtain microfoundations for two well-known statistical models, extending their predictive power.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Market Microstructure, Learning & Adaptive Behaviors
Numerical Simulation, Dynamical Systems Theory, Agent-based Modelling
Spherical integrals and their applications to random matrix theory
PhD Thesis
2 novembre 2022
Pierre Mergny
Random matrix theory has found applications in many fields of physics (disordered systems, stability of dynamical systems, interface models, electronic transport,...) and mathematics (operator algebra, numerative combinatorics, number theory,...). A recurrent problem in many domains is to understand how the spectra of two random matrices recombine when we perform their sum or product. In this thesis, we study this problem through the prism of spherical integrals and with the help of statistical physics tools. These spherical integrals play the role of the Fourier transform in random matrix theory and their study
allows us to better understand the properties of both the limiting spectral density and the largest eigenvalue of these matrix models.
Topics:
Methods:
Numerical Simulation, Random Matrix Theory
Large macroeconomic fluctuations: Self-organized criticality in firm networks, agent-based models and random matrices
PhD Thesis
1 novembre 2022
Théo Dessertaine
What is the origin of macroeconomic fluctuations? In the late XXth century, Ben Bernanke first introduced the so-called "small shocks, large business cycles" puzzle as the seeming incompatibility between small fluctuations observed at granular levels of the economy (small shocks) and large macroeconomic fluctuations (large business cycles). As an example, the Unites States’ GDP displays a steady average yearly growth rate of around 3% but with fluctuations reaching 2.7%. The conundrum is that most of this volatility cannot be linked to known exogeneous crises, such as oil shocks or the 2008 financial crisis, and must therefore be of endogeneous origin, i.e. generated by the economy itself. Numerous explanations have been proposed, the most famous of which involve the power-law distribution of firms’ sizes, rippling out at aggregate levels of the economy, or network effects responsible for amplifying micro-level shocks. However, these explanations rely on equilibrium-only economic models which picture the world as a succession of equilibria instantaneously reached without friction, and which tautologically do not account for out-of-equilibrium effects. In this thesis, the first two parts are devoted to finding mechanisms accounting for the excess volatility through those overlooked out-of-equilibrium effects. The third part is dedicated to studying more general properties of so-called conewise linear systems, which are ubiquitous in economics.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Economic Networks, Learning & Adaptive Behaviors
Random Matrix Theory, Dynamical Systems Theory, Stochastic Processes, Agent-based Modelling, Statistical Mechanics
Multivariate Quadratic Hawkes Processes -- Part I: Theoretical Analysis
arXiv preprint
26 juin 2022
Cecilia Aubrun, Michael Benzaquen, J-P Bouchaud
Quadratic Hawkes (QHawkes) processes have proved effective at reproducing the statistics of price changes, capturing many of the stylised facts of financial markets. Motivated by the recently reported strong occurrence of endogenous co-jumps (simultaneous price jumps of several assets) we extend QHawkes to a multivariate framework (MQHawkes), that is considering several financial assets and their interactions. Assuming that quadratic kernels write as the sum of a time-diagonal component and a rank one (trend) contribution, we investigate endogeneity ratios and the resulting stationarity conditions. We then derive the so-called Yule-Walker equations relating covariances and feedback kernels, which are essential to calibrate the MQHawkes process on empirical data. Finally, we investigate the volatility distribution of the process and find that, as in the univariate case, it exhibits power-law behavior, with an exponent that can be exactly computed in some limiting cases.
Topics:
Methods:
Market Microstructure, Financial Time-series, Endogenous Crises & Emergent Phenomena
Stochastic Processes
Microfounding GARCH Models and Beyond: A Kyle-inspired Model with Adaptive Agents
SSRN Preprint
22 juin 2022
Michele Vodret, Iacopo Mastromatteo, Bence Toth, Michael Benzaquen
We relax the strong rationality assumption for the agents in the paradigmatic Kyle model of price formation, thereby reconciling the framework of asymmetrically informed traders with the Adaptive Market Hypothesis, where agents use inductive rather than deductive reasoning. Building on these ideas, we propose a stylised model able to account parsimoniously for a rich phenomenology, ranging from excess volatility to volatility clustering. While characterising the excess-volatility dynamics, we provide a microfoundation for GARCH models. Volatility clustering is shown to be related to the self-excited dynamics induced by traders' behaviour, and does not rely on clustered fundamental innovations. Finally, we propose an extension to account for the fragile dynamics exhibited by real markets during flash crashes.
Topics:
Methods:
Market Microstructure, Financial Time-series, Learning & Adaptive Behaviors
Agent-based Modelling, Numerical Simulation
Bounded Rationality and Animal Spirits: A Fluctuation-Response Approach to Slutsky Matrices
arXiv preprint
8 juin 2022
Jerome Garnier-Brun, J-P Bouchaud, Michael Benzaquen
The Slutsky equation, central in consumer choice theory, is derived from the usual hypotheses underlying most standard models in Economics, such as full rationality, homogeneity, and absence of interactions. We present a statistical physics framework that allows us to relax such assumptions. We first derive a general fluctuation-response formula that relates the Slutsky matrix to spontaneous fluctuations of consumption rather than to response to changing prices and budget. We then show that, within our hypotheses, the symmetry of the Slutsky matrix remains valid even when agents are only boundedly rational but non-interacting. We then propose a model where agents are influenced by the choice of others, leading to a phase transition beyond which consumption is dominated by herding (or `"fashion") effects. In this case, the individual Slutsky matrix is no longer symmetric, even for fully rational agents. The vicinity of the transition features a peak in asymmetry.
Topics:
Methods:
Economic Networks
Stochastic Processes, Numerical Simulation, Statistical Mechanics, Random Matrix Theory
Out-of-equilibrium dynamics and excess volatility in firm networks
Journal of Economic Dynamics and Control
30 avril 2022
Théo Dessertaine, Jose Moran, Michael Benzaquen, J-P Bouchaud
We study the conditions under which input-output networks can dynamically attain competitive equilibrium, where markets clear and profits are zero. We endow a classical firm network model with simple dynamical rules that reduce supply/demand imbalances and excess profits. We show that the time needed to reach equilibrium diverges as the system approaches an instability point beyond which the Hawkins-Simons condition is violated and competitive equilibrium is no longer realisable. We argue that such slow dynamics is a source of excess volatility, through accumulation and amplification of exogenous shocks. Factoring in essential physical constraints, such as causality or inventory management, we propose a dynamically consistent model that displays a rich variety of phenomena. Competitive equilibrium can only be reached after some time and within some region of parameter space, outside of which one observes periodic and chaotic phases, reminiscent of real business cycles. This suggests an alternative explanation of the excess volatility that is of purely endogenous nature. Other regimes include deflationary equilibria and intermittent crises characterised by bursts of inflation. Our model can be calibrated using highly disaggregated data on individual firms and prices, and may provide a powerful tool to describe out-of-equilibrium economies.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Economic Networks, Learning & Adaptive Behaviors
Agent-based Modelling, Numerical Simulation, Dynamical Systems Theory
A New Spin on Color Quantization
arXiv preprint
25 avril 2022
Samy Lakhal, Alexandre Darmon, Michael Benzaquen
We address the problem of image color quantization using a Maximum Entropy based approach. We argue that adding thermal noise to the system yields better visual impressions than that obtained from a simple energy minimization. To quantify this observation, we introduce the coarse-grained quantization error, and seek the optimal temperature which minimizes this new observable. By comparing images with different structural properties, we show that the optimal temperature is a good proxy for complexity at different scales. Finally, having shown that the convoluted error is a key observable, we directly minimize it using a Monte Carlo algorithm to generate a new series of quantized images. Adopting an original approach based on the informativity of finite size samples, we are able to determine the optimal convolution parameter leading to the best visuals.
Topics:
Methods:
Image Processing
Numerical Simulation, Statistical Mechanics, Information Theory
Scale Dependencies and Self-Similarity Through Wavelet Scattering Covariance
arXiv preprint
18 avril 2022
Rudy Morel, Gaspar Rochette, Roberto Leonarduzzi, J-P Bouchaud, Stephane Mallat
We introduce a scattering covariance matrix which provides non-Gaussian models of time-series having stationary increments. A complex wavelet transform computes signal variations at each scale. Dependencies across scales are captured by the joint covariance across time and scales of complex wavelet coefficients and their modulus. This covariance is nearly diagonalized by a second wavelet transform, which defines the scattering covariance. We show that this set of moments characterizes a wide range of non-Gaussian properties of multi-scale processes. This is analyzed for a variety of processes, including fractional Brownian motions, Poisson, multifractal random walks and Hawkes processes. We prove that self-similar processes have a scattering covariance matrix which is scale invariant. This property can be estimated numerically and defines a class of wide-sense self-similar processes. We build maximum entropy models conditioned by scattering covariance coefficients, and generate new time-series with a microcanonical sampling algorithm. Applications are shown for highly non-Gaussian financial and turbulence time-series.
Topics:
Methods:
Financial Time-series
Stochastic Processes, Empirical Analysis, Numerical Simulation
The multivariate price formation process and cross-impact
PhD Thesis
29 mars 2022
Mehdi Tomas
This thesis comprises six parts. The first relates anonymous order flow and price changes using static, linear cross-impact models. We list desirable properties of such models, characterise those which satisfy them and test their predictions on different markets. The second part extends this approach to derivatives to obtain a tractable estimation method for cross-impact which is applied to SP500 options and VIX futures. In the third part, we generalise the previous setup to derive and estimate cross-impact models which account for the influence of past trades on current prices. The fourth part uses meta-order databases on stocks and futures to propose a formula for cross-impact which generalises the square-root law of market impact. In the fifth part, we propose a tick-by-tick model for price dynamics using Hawkes processes. We investigate scaling limits of prices in the high endogeneity regime to derive multivariate macroscopic price dynamics of rough Heston type. Finally, the last part solves the calibration problem of volatility models using neural networks.
Topics:
Methods:
Market Microstructure, Financial Time-series, Risk Management
Stochastic Processes, Empirical Analysis, Numerical Simulation, Statistical Mechanics
The Inelastic Market Hypothesis: A Microstructural Interpretation
arXiv preprint
10 janvier 2022
J-P Bouchaud
We attempt to reconcile Gabaix and Koijen's (GK) recent Inelastic Market Hypothesis (IMH) with the order-driven view of markets that emerged within the microstructure literature in the past 20 years. We review the most salient empirical facts and arguments that give credence to the idea that market price fluctuations are mostly due to order flow, whether informed or non-informed. We show that the Latent Liquidity Theory of price impact makes a precise prediction for GK's multiplier M, which measures by how many dollars, on average, the market value of a company goes up if one buys one dollar worth of its stocks. Our central result is that M is of order unity, as found by GK, and increases with the volatility of the stock and decreases with the fraction of the market cap. traded daily. We discuss several empirical results suggesting that the lion's share of volatility is due to trading activity. We argue that the IMH holds for all asset classes, beyond the case of stock markets considered by GK.
Topics:
Methods:
Market Microstructure, Risk Management
Numerical Simulation
Will Random Cone-wise Linear Systems Be Stable?
arXiv preprint
3 janvier 2022
Théo Dessertaine, J-P Bouchaud
We consider a simple model for multidimensional cone-wise linear dynamics around cusp-like equilibria. We assume that the local linear evolution is either v′=Av or Bv (with A, B independently drawn a rotationally invariant ensemble of N×N matrices) depending on the sign of the first component of v. We establish strong connections with the random diffusion persistence problem. When N→∞, we find that the Lyapounov exponent is non self-averaging, i.e. one can observe apparent stability and apparent instability for the same system, depending on time and initial conditions. Finite N effects are also discussed, and lead to cone trapping phenomena.
Topics:
Methods:
Statistical Mechanics
On Hawkes Processes with Infinite Mean Intensity
Physical Review E
27 décembre 2021
Cecilia Aubrun, Michael Benzaquen, J-P Bouchaud
The stability condition for Hawkes processes and their non-linear extensions usually relies on the condition that the mean intensity is a finite constant. It follows that the total endogeneity ratio needs to be strictly smaller than unity. In the present note we argue that it is possible to have a total endogeneity ratio greater than unity without rendering the process unstable. In particular, we show that, provided the endogeneity ratio of the linear Hawkes component is smaller than unity, Quadratic Hawkes processes are always stationary, although with infinite mean intensity when the total endogenity ratio exceeds one. This results from a subtle compensation between the inhibiting realisations (mean-reversion) and their exciting counterparts (trends).
Topics:
Methods:
Financial Time-series
Stochastic Processes, Numerical Simulation
Crises propagation and behavioural effects in multi agents self-reflexive real business cycle models
PhD Thesis
6 décembre 2021
Federico Morelli
The Global Financial Crisis of 2008 left was also a crisis for macroeconomic models. On the one hand, orthodox economists persist in using the skeleton of classical models, while on the other hand, various groups of heterodoxes have proposed different ways to change the foundations of Economics. My research aims to bridge the gap between Neo-classical Economics and complexity Economics using methods and techniques from statistical physics. Beginning with standard economic models, I study the addition of a self reflexive feedback impacting the confidence of individual economic agents. This induces large output swings despite only minor variations in economic conditions. Within this framework, economic crises propagate endogenously and are amplified by interactions. Later on, I enrich the previous framework by taking into account heterogeneities, studying how economic recessions propagate through different strata of society. In the last part of this work, I present a behavioural economic model where the stability of the economy is jeopardised by the lack of investments in risky markets.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Economic Networks, Learning & Adaptive Behaviors
Agent-based Modelling, Empirical Analysis, Numerical Simulation, Statistical Mechanics
Universal amplitudes ratios for critical aging via functional renormalization group
arXiv preprint
5 décembre 2021
Michele Vodret, Alessio Chiocchetta, Andrea Gambassi
We discuss how to calculate non-equilibrium universal amplitude ratios in the functional renormalization group approach, extending its applicability. In particular, we focus on the critical relaxation of the Ising model with non-conserved dynamics (model A) and calculate the universal amplitude ratio associated with the fluctuation-dissipation ratio of the order parameter, considering a critical quench from a high-temperature initial condition. Our predictions turn out to be in good agreement with previous perturbative renormalization-group calculations and Monte Carlo simulations.
Topics:
Methods:
Numerical Simulation, Statistical Mechanics
Do fundamentals shape the price response? A critical assessment of linear impact models
arXiv preprint
5 décembre 2021
Michele Vodret, Iacopo Mastromatteo, Bence Toth, Michael Benzaquen
We compare the predictions of the stationary Kyle model, a microfounded multi-step linear price impact model in which market prices forecast fundamentals through information encoded in the order flow, with those of the propagator model, a purely data-driven model in which trades mechanically impact prices with a time-decaying kernel. We find that, remarkably, both models predict the exact same price dynamics at high frequency, due to the emergence of universality at small time scales. On the other hand, we find those models to disagree on the overall strength of the impact function by a quantity that we are able to relate to the amount of excess-volatility in the market. We reveal a crossover between a high-frequency regime in which the market reacts sub-linearly to the signed order flow, to a low-frequency regime in which prices respond linearly to order flow imbalances. Overall, we reconcile results from the literature on market microstructure (sub-linearity in the price response to traded volumes) with those relating to macroeconomically relevant timescales (in which a linear relation is typically assumed).
Topics:
Methods:
Market Microstructure
Agent-based Modelling
Exploration of the Parameter Space in Macroeconomic Agent-Based Models
SSRN Preprint
15 novembre 2021
Karl Naumann-Woleske, Max Sina Knicker, Michael Benzaquen, J-P Bouchaud
Agent-Based Models (ABM) are computational scenario-generators, which can be used to predict the possible future outcomes of the complex system they represent. To better understand the robustness of these predictions, it is necessary to understand the full scope of the possible phenomena the model can generate. Most often, due to high-dimensional parameter spaces, this is a computationally expensive task. Inspired by ideas coming from systems biology, we show that for multiple macroeconomic models, including an agent-based model and several Dynamic Stochastic General Equilibrium (DSGE) models, there are only a few stiff parameter combinations that have strong effects, while the other sloppy directions are irrelevant.
This suggest an algorithm that efficiently explores the space of parameters by primarily moving along the stiff directions. We apply our algorithm to a medium-sized agent-based model, and show that it recovers all possible dynamics of the unemployment rate. The application of this method to Agent-based Models may lead to a more thorough and robust understanding of their features, and provide enhanced parameter sensitivity analyses. Several promising paths for future research are discussed.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Learning & Adaptive Behaviors
Agent-based Modelling, Numerical Simulation
Capital Demand Driven Business Cycles: Mechanism and Effects
SSRN Preprint
29 septembre 2021
Karl Naumann-Woleske, Michael Benzaquen, Maxim Gusev, Dimitri Kroujiline
We develop a tractable macroeconomic model that captures dynamic behaviors across multiple timescales, including business cycles. The model is anchored in a dynamic capital demand framework reflecting an interactions-based process whereby firms determine capital needs and make investment decisions on a micro level. We derive equations for aggregate demand from this micro setting and embed them in the Solow growth economy. As a result, we obtain a closed-form dynamical system with which we study economic fluctuations and their impact on long-term growth. For realistic parameters, the model has two attracting equilibria: one at which the economy contracts and one at which it expands. This bi-stable configuration gives rise to quasiperiodic fluctuations, characterized by the economy’s prolonged entrapment in either a contraction or expansion mode punctuated by rapid alternations between them. We identify the underlying endogenous mechanism as a coherence resonance phenomenon. In addition, the model admits a stochastic limit cycle likewise capable of generating quasiperiodic fluctuations; however, we show that these fluctuations cannot be realized as they induce unrealistic growth dynamics. We further find that while the fluctuations powered by coherence resonance can cause substantial excursions from the equilibrium growth path, such deviations vanish in the long run as supply and demand converge.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Learning & Adaptive Behaviors
Numerical Simulation, Statistical Mechanics
Economic Crises in a Model with Capital Scarcity and Self-Reflexive Confidence
SSRN Preprint
19 septembre 2021
Federico Morelli, Karl Naumann-Woleske, Michael Benzaquen, Marco Tarzia, J-P Bouchaud
In the General Theory, Keynes remarked that the economy's state depends on expectations, and that these expectations can be subject to sudden swings. In this work, we develop a multiple equilibria behavioural business cycle model that can account for demand or supply collapses due to abrupt drops in consumer confidence, which affect both consumption propensity and investment. We show that, depending on the model parameters, four qualitatively different outcomes can emerge, characterised by the frequency of capital scarcity and/or demand crises. In the absence of policy measures, the duration of such crises can increase by orders of magnitude when parameters are varied, as a result of the ``paradox of thrift''. Our model suggests policy recommendations that prevent the economy from getting trapped in extended stretches of low output, low investment and high unemployment.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Economic Networks, Learning & Adaptive Behaviors
Agent-based Modelling, Empirical Analysis, Numerical Simulation, Statistical Mechanics
Exogenous and Endogenous Price Jumps Belong to Different Dynamical Classes
SSRN Preprint
13 juin 2021
Riccardo Marcaccioli, J-P Bouchaud, Michael Benzaquen
Synchronizing a database of stock specific news with 5 years worth of order book data on 300 stocks, we show that abnormal price movements following news releases (exogenous) exhibit markedly different dynamical features from those arising spontaneously (endogenous). On aver- age, large volatility fluctuations induced by exogenous events occur abruptly and are followed by a decaying power-law relaxation, while endogenous price jumps are characterized by progressively accelerating growth of volatility, also followed by a power-law relaxation, but slower than for exogenous jumps. Remarkably, our results are reminiscent of what is observed in different contexts, namely Amazon book sales and YouTube views. Finally, we show that fitting power-laws to individual volatility profiles allows one to classify large events into endogenous and exogenous dynamical classes, without relying on the news feed.
Topics:
Methods:
Financial Time-series, Endogenous Crises & Emergent Phenomena
Empirical Analysis, Statistical Mechanics
Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events
European Journal of Finance
11 avril 2021
Antoine Fosset, J-P Bouchaud, Michael Benzaquen
We propose an actionable calibration procedure for general Quadratic Hawkes models of order book events (market orders, limit orders, cancellations). One of the main features of such models is to encode not only the influence of past events on future events but also, crucially, the influence of past price changes on such events. We show that the empirically calibrated quadratic kernel is well described by a diagonal contribution (that captures past realised volatility), plus a rank-one ‘Zumbach’ contribution (that captures the effect of past trends). We find that the Zumbach kernel is a power-law of time, as are all other feedback kernels. As in many previous studies, the rate of truly exogenous events is found to be a small fraction of the total event rate. These two features suggest that the system is close to a critical point – in the sense that slightly stronger feedback kernels would lead to endogenous liquidity crises.
Topics:
Methods:
Market Microstructure, Financial Time-series, Endogenous Crises & Emergent Phenomena
Stochastic Processes, Empirical Analysis
A new spin on optimal portfolios and ecological equilibria
Journal of Statistical Mechanics: Theory and Experiment
31 mars 2021
Jerome Garnier-Brun, Michael Benzaquen, Stefano Ciliberti, J-P Bouchaud
We consider the classical problem of optimal portfolio construction with the constraint that no short position is allowed, or equivalently the valid equilibria of multispecies Lotka-Volterra equations, in the special case where the interaction matrix is of unit rank, corresponding to a single-resource MacArthur model. We compute the average number of solutions and show that its logarithm grows as Nα, where N is the number of assets or species and α≤2/3 depends on the interaction matrix distribution. We conjecture that the most likely number of solutions is much smaller and related to the typical sparsity m(N) of the solutions, which we compute explicitly. We also find that the solution landscape is similar to that of spin-glasses, i.e. very different configurations are quasi-degenerate. Correspondingly, "disorder chaos" is also present in our problem. We discuss the consequence of such a property for portfolio construction and ecologies, and question the meaning of rational decisions when there is a very large number "satisficing" solutions.
Topics:
Methods:
Social Dynamics, Risk Management
Numerical Simulation, Statistical Mechanics
A Stationary Kyle Setup: Microfounding propagator models
Journal of Statistical Mechanics
29 mars 2021
Michele Vodret, Iacopo Mastromatteo, Bence Toth, Michael Benzaquen
We provide an economically sound micro-foundation to linear price impact models, by deriving them as the equilibrium of a suitable agent-based system. In particular, we retrieve the so-called propagator model as the high-frequency limit of a generalized Kyle model, in which the assumption of a terminal time at which fundamental information is revealed is dropped. This allows to describe a stationary market populated by asymmetrically-informed rational agents. We investigate the stationary equilibrium of the model, and show that the setup is compatible with universal price diffusion at small times, and non-universal mean-reversion at time scales at which fluctuations in fundamentals decay. Our model suggests that at high frequency one should observe a quasi-permanent impact component, driven by slow fluctuations of fundamentals, and a faster transient one, whose timescale should be set by the persistence of the order flow.
Topics:
Methods:
Market Microstructure, Learning & Adaptive Behaviors
Agent-based Modelling, Empirical Analysis
V –, U –, L – Or W–Shaped Economic Recovery After COVID-19: Insights From an Agent Based Model
PLoS One
1 mars 2021
Dhruv Sharma, J-P Bouchaud, Stanislao Gualdi, Marco Tarzia, Francesco Zamponi
We discuss the impact of a Covid-19–like shock on a simple model economy, described by the previously developed Mark-0 Agent-Based Model. We consider a mixed supply and demand shock, and show that depending on the shock parameters (amplitude and duration), our model economy can display V-shaped, U-shaped or W-shaped recoveries, and even an L-shaped output curve with permanent output loss. This is due to the economy getting trapped in a self-sustained “bad” state. We then discuss two policies that attempt to moderate the impact of the shock: giving easy credit to firms, and the so-called helicopter money, i.e. injecting new money into the households savings. We find that both policies are effective if strong enough. We highlight the potential danger of terminating these policies too early, although inflation is substantially increased by lax access to credit. Finally, we consider the impact of a second lockdown. While we only discuss a limited number of scenarios, our model is flexible and versatile enough to accommodate a wide variety of situations, thus serving as a useful exploratory tool for a qualitative, scenario-based understanding of post-Covid recovery. The corresponding code is available on-line.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena
Agent-based Modelling
From Ants to Fishing Vessels: A Simple Model for Herding and Exploitation of Finite Resources
arXiv preprint
23 février 2021
Jose Moran, Antoine Fosset, Alan Kirman, Michael Benzaquen
We analyse the dynamics of fishing vessels with different home ports in an area where these vessels, in choosing where to fish, are influenced by their own experience in the past and by their current observation of the locations of other vessels in the fleet. Empirical data from the boats near Ancona and Pescara shows stylized statistical properties that are reminiscent of Kirman and Föllmer's ant recruitment model, although with two ant colonies represented by the two ports. From the point of view of a fisherman, the two fishing areas are not equally attractive, and he tends to prefer the one closer to where he is based. This piece of evidence led us to extend the original ants model to a situation with two asymmetric zones and finite resources. We show that, in the mean-field regime, our model exhibits the same properties as the empirical data. We obtain a phase diagram that separates high and low herding regimes, but also fish population extinction. Our analysis has interesting policy implications for the ecology of fishing areas. It also suggests that herding behaviour here, just as in financial markets, will lead to significant fluctuations in the amount of fish landed, as the boat concentration on one area at a given point in time will diminish the overall catch, such loss not being compensated by the reproduction of fish in the other area. In other terms, individually rational behaviour will not lead to collectively optimal results.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Social Dynamics, Learning & Adaptive Behaviors
Empirical Analysis, Statistical Mechanics
Cross impact in derivative markets
arXiv preprint
3 février 2021
Mehdi Tomas, Iacopo Mastromatteo, Michael Benzaquen
We introduce a linear cross-impact framework in a setting in which the price of some given financial instruments (derivatives) is a deterministic function of one or more, possibly tradeable, stochastic factors (underlying). We show that a particular cross-impact model, the multivariate Kyle model, prevents arbitrage and aggregates (potentially non-stationary) traded order flows on derivatives into (roughly stationary) liquidity pools aggregating order flows traded on both derivatives and underlying. Using E-Mini futures and options along with VIX futures, we provide empirical evidence that the price formation process from order flows on derivatives is driven by cross-impact and confirm that the simple Kyle cross-impact model is successful at capturing parsimoniously such empirical phenomenology. Our framework may be used in practice for estimating execution costs, in particular hedging costs.
Topics:
Methods:
Market Microstructure, Financial Time-series, Risk Management
Stochastic Processes, Empirical Analysis, Numerical Simulation, Statistical Mechanics
Asymptotic behavior of the multiplicative counterpart of the Harish-Chandra integral and the S-transform
arXiv preprint
21 janvier 2021
Pierre Mergny, Marc Potters
In this note, we study the asymptotic of spherical integrals, which are analytical extension in index of the normalized Schur polynomials for β=2 , and of Jack symmetric polynomials otherwise. Such integrals are the multiplicative counterparts of the Harish-Chandra-Itzykson-Zuber (HCIZ) integrals, whose asymptotic are given by the so-called R-transform when one of the matrix is of rank one. We argue by a saddle-point analysis that a similar result holds for all β>0 in the multiplicative case, where the asymptotic is governed by the logarithm of the S-transform. As a consequence of this result one can calculate the asymptotic behavior of complete homogeneous symmetric polynomials.
Topics:
Methods:
Random Matrix Theory
Crisis Propagation in a Heterogeneous Self-Reflexive DSGE Model
arXiv preprint
13 janvier 2021
Federico Morelli, Michael Benzaquen, J-P Bouchaud, Marco Tarzia
We study a self-reflexive DSGE model with heterogeneous households, aimed at characterising the impact of economic recessions on the different strata of the society. Our framework allows to analyse the combined effect of income inequalities and confidence feedback mediated by heterogeneous social networks. By varying the parameters of the model, we find different crisis typologies: loss of confidence may propagate mostly within high income households, or mostly within low income households, with a rather sharp crossover between the two. We find that crises are more severe for segregated networks (where confidence feedback is essentially mediated between agents of the same social class), for which cascading contagion effects are stronger. For the same reason, larger income inequalities tend to reduce, in our model, the probability of global crises. Finally, we are able to reproduce a perhaps counter-intuitive empirical finding: in countries with higher Gini coefficients, the consumption of the lowest income households tends to drop less than that of the highest incomes in crisis times.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Social Dynamics
Numerical Simulation, Statistical Mechanics
Why does individual learning endure when crowds are wiser?
arXiv preprint
27 décembre 2020
Benoït de Courson, Léo Fitouchi, J-P Bouchaud, Michael Benzaquen
The ability to learn from others (social learning) is often deemed a cause of human species success. But if social learning is indeed more efficient (whether less costly or more accurate) than individual learning, it raises the question of why would anyone engage in individual information seeking, which is a necessary condition for social learning's efficacy. We propose an evolutionary model solving this paradox, provided agents (i) aim not only at information quality but also vie for audience and prestige, and (ii) do not only value accuracy but also reward originality -- allowing them to alleviate herding effects. We find that under some conditions (large enough success rate of informed agents and intermediate taste for popularity), both social learning's higher accuracy and the taste for original opinions are evolutionary-stable, within a mutually beneficial division of labour-like equilibrium. When such conditions are not met, the system most often converges towards mutually detrimental equilibria.
Topics:
Methods:
Social Dynamics, Learning & Adaptive Behaviors
Agent-based Modelling, Statistical Mechanics
Macroeconomic Agent-based Models: A Statistical Physics perspective
PhD Thesis
25 novembre 2020
Dhruv Sharma
The object of this thesis is to advance a methodology commonly used in statistical physics and apply it to the study of two macroeconomic agent-based models. In both models studied here, we first determine the “phase-diagram” of the model to identify the relevant macroscopic regimes to develop an intuitive understanding of the macrodynamics using a small subset of parameters. The first ABM presented here builds upon the paradigm of constraint satisfaction problems (CSPs) and integrates it within the model’s behavioral rules via agents’ budgetary constraints. These constraints, similar to the well-studied perceptron CSP, reveal the existence of three regimes and underscore the importance of debt for macroeconomic stability: at low-levels of debt, the economy remains structure-less with frequent bankruptcies while high debt leads to endogenous business cycles. Between these two extremes, an intermediate regime of relative stability is found with low levels of bankruptcies for all times. Within this ABM, agents’ preferences, serving as the source of disorder in the CSP, evolve continuously in time. We thus study a simple dynamical scheme for the perceptron and discover that a rugged landscape can indeed exist with dynamic, annealed disorder. Finally, we extend the Mark-0 ABM to simulate exogenous consumption and productivity shocks due to the Covid pandemic. Whereas standard approaches design a model to understand a particular outcome, this model can generate a variety of scenarios after a Covid-like shock. Furthermore, we also investigate the efficacy of several policies, including the much-debated “helicopter money” drop, in avoiding economic collapse. We thus highlight the importance of ABMs as multi-purpose “scenario generators”, for producing outcomes that are difficult to foresee due to the intrinsic complexity of macro-economic dynamics.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Learning & Adaptive Behaviors
Agent-based Modelling, Empirical Analysis, Numerical Simulation
Statistical physics and anomalous macroeconomic fluctuations
PhD Thesis
12 octobre 2020
Jose Moran
How do microscopic perturbations at the level of an individual grow to become macroscopic fluctuations of the whole economy? Despite decades of effort, this puzzle remains open. In this work, I tackle this problem using methods and techniques from statistical physics. Beginning with a thorough analysis of power law distributions, I argue that understanding their origin and properties helps in elucidating their socio-economic consequences. I then explore a model of an economy where firms interact through a production network in a way that causes them to be intrinsically prone to amplify fluctuations. Later on, I conduct an empirical survey of the statistical properties of firm growth rates and provide a framework to study their dynamics. I finally move onto models where non trivial collective phenomena arise from imitation and memory effects at the level of the individual, highlighting the need of accounting for complexity in economic modelling.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Learning & Adaptive Behaviors
Agent-based Modelling, Empirical Analysis, Numerical Simulation
How to build a cross-impact model from first principles: Theoretical requirements and empirical results
arXiv preprint
12 septembre 2020
Mehdi Tomas, Iacopo Mastromatteo, Michael Benzaquen
Trading a financial instrument induces a price response on itself and on other correlated instruments, a phenomenon known as cross-impact. Unfortunately, empirical measures of cross-impact are affected by a large estimation error due to both the large number of interactions to infer and the strongly fluctuating nature of price returns. In this study we propose a principled approach that leverages simple consistency criteria (symmetries, no-arbitrage conditions, correlation and liquidity limit-case properties) in order to impose ex-ante properties that might be required for practical applications. We validate our approach on empirical data for several asset classes, thus determining which properties are desirable across multiple markets. In particular, our results show that two cross-impact models perform well in all markets studied but only one is suitable for other applications, such as optimal execution.
Topics:
Methods:
Market Microstructure, Financial Time-series
Stochastic Processes, Empirical Analysis, Numerical Simulation
Endogenous Liquidity Crises in Financial Markets
PhD Thesis
8 septembre 2020
Antoine Fosset
Recent empirical analyses have revealed the existence of the Zumbach effect. This discovery has led to the development of quadratic Hawkes processes, which are suitable for reproducing this effect. Since this model is not linked with the price formation process, we extended it to order book modeling with a generalized quadratic Hawkes process (GQ-Hawkes). Using market data, we showed that there is a Zumbach-like effect that decreases future liquidity. Microfounding the Zumbach effect, it is responsible for a destabilization of financial markets. Moreover, the exact calibration of a GQ-Hawkes process tells us that the markets are on the verge of criticality. This empirical evidence therefore prompted us to analyse an order-book model constructed upon a Zumbach-like feedback. We therefore introduced the quadratic Santa Fe model and proved numerically that there is a phase transition between a stable market and an unstable market subject to liquidity crises. Thanks to a finite size scaling we were able to determine the critical exponents of this transition, which appears to belong to a new universality class. As this was not analytically tractable, it led us to introduce simpler models to describe liquidity crises. Setting aside the microstructure of the order book, we obtain a class of spread models where we computed the critical parameters of their transitions. Even if these exponents are not those of the quadratic Santa Fe transition, these models open new horizons for modelling spread dynamics. One of them has a non-linear coupling that reveals a metastable state. This elegant alternative scenario does not need critical parameters to obtain an unstable market, even if the empirical evidence is not in its favour. Finally, we looked at the order book dynamics from another point of view: the reaction-diffusion one. We have modelled a liquidity that appears in the order book with a certain frequency. The resolution of this model at equilibrium reveals that there is a condition of stability on the parameters beyond which the order book empties completely, corresponding to a liquidity crisis. By calibrating it on market data we were able to qualitatively analyse the distance to this unstable region.
Topics:
Methods:
Market Microstructure, Financial Time-series, Endogenous Crises & Emergent Phenomena, Risk Management
Stochastic Processes, Agent-based Modelling, Statistical Mechanics, Empirical Analysis, Numerical Simulation
Schrödinger's ants: a continuous description of Kirman's recruitment model
Journal of Physics: Complexity
3 août 2020
Jose Moran, Antoine Fosset, Michael Benzaquen, J-P Bouchaud
We show how the approach to equilibrium in Kirman's ants model can be fully characterized in terms of the spectrum of a Schrödinger equation with a Pöschl–Teller (tan2) potential. Among other interesting properties, we have found that in the bimodal phase where ants visit mostly one food site at a time, the switch time between the two sources only depends on the 'spontaneous conversion' rate and not on the recruitment rate. More complicated correlation functions can be computed exactly, and involve higher and higher eigenvalues and eigenfunctions of the Schrödinger operator, which can be expressed in terms of hypergeometric functions.
Topics:
Methods:
Social Dynamics, Learning & Adaptive Behaviors
Statistical Mechanics
Beauty and structural complexity
Physical Review Research
26 mai 2020
Samy Lakhal, Alexandre Darmon, J-P Bouchaud, Michael Benzaquen
We revisit the long-standing question of the relation between image appreciation and its statistical properties. We generate two different sets of random images well distributed along three measures of entropic complexity. We run a large-scale survey in which people are asked to sort the images by preference, which reveals maximum appreciation at intermediate entropic complexity. We show that the algorithmic complexity of the coarse-grained images, expected to capture structural complexity while abstracting from high frequency noise, is a good predictor of preferences. Our analysis suggests that there might exist some universal quantitative criteria for aesthetic judgment.
Topics:
Methods:
Image Processing
Empirical Analysis, Deep Learning & Natural Language Processing, Information Theory
By force of habit: Self-trapping in a dynamical utility landscape
Chaos
10 mai 2020
Jose Moran, Antoine Fosset, Davide Luzzati, J-P Bouchaud, Michael Benzaquen
Historically, rational choice theory has focused on the utility maximization principle to describe how individuals make choices. In reality, there is a computational cost related to exploring the universe of available choices and it is often not clear whether we are truly maximizing an underlying utility function. In particular, memory effects and habit formation may dominate over utility maximization. We propose a stylized model with a history-dependent utility function, where the utility associated to each choice is increased when that choice has been made in the past, with a certain decaying memory kernel. We show that self-reinforcing effects can cause the agent to get stuck with a choice by sheer force of habit. We discuss the special nature of the transition between free exploration of the space of choice and self-trapping. We find, in particular, that the trapping time distribution is precisely a Zipf law at the transition, and that the self-trapped phase exhibits super-aging behavior.
Topics:
Methods:
Risk Management
Statistical Mechanics
Confidence collapse in a multihousehold, self-reflexive DSGE model
PNAS
27 avril 2020
Federico Morelli, Michael Benzaquen, Marco Tarzia, J-P Bouchaud
We investigate a multihousehold dynamic stochastic general equilibrium (DSGE) model in which past aggregate consumption impacts the confidence, and therefore consumption propensity, of individual households. We find that such a minimal setup is extremely rich and leads to a variety of realistic output dynamics: high output with no crises; high output with increased volatility and deep, short-lived recessions; and alternation of high- and low-output states where a relatively mild drop in economic conditions can lead to a temporary confidence collapse and steep decline in economic activity. The crisis probability depends exponentially on the parameters of the model, which means that markets cannot efficiently price the associated risk premium. We conclude by stressing that within our framework, narratives become an important monetary policy tool that can help steer the economy back on track.
Topics:
Methods:
Endogenous Crises & Emergent Phenomena, Social Dynamics
Statistical Mechanics, Numerical Simulation
How Much Income Inequality Is Too Much?
arXiv preprint
11 avril 2020
J-P Bouchaud
We propose a highly schematic economic model in which, in some cases, wage inequalities lead to higher overall social welfare. This is due to the fact that high earners can consume low productivity, non essential products, which allows everybody to remain employed even when the productivity of essential goods is high and producing them does not require everybody to work. We derive a relation between heterogeneities in technologies and the minimum Gini coefficient required to maximize global welfare. Stronger inequalities appear to be economically unjustified. Our model may shed light on the role of non-essential goods in the economy, a topical isue when thinking about the post-Covid-19 world
Topics:
Methods:
Wealth & Income Inequality
Dynamical Systems Theory
Are trading invariants really invariant? Trading costs matter
Quantitative Finance
6 avril 2020
Frédéric Bucci, Fabrizio Lillo, J-P Bouchaud, Michael Benzaquen
We revisit the trading invariance hypothesis recently proposed by Kyle and Obizhaeva by empirically investigating a large dataset of bets, or metaorders, provided by ANcerno. The hypothesis predicts that the quantity I := R/N^3/2, where R is the exchanged risk (volatility × volume × price) and N is the number of bets, is invariant. We find that the 3/2 scaling between R and N works well and is robust against changes of year, market capitalisation and economic sector. However our analysis clearly shows that I is not invariant. We find a very high correlation (> 0.8) between I and the total trading cost (spread and market impact) of the bet. We propose new invariants defined as a ratio of I and costs and find a large decrease in variance. We show that the small dispersion of the new invariants is mainly driven by (i) the scaling of the spread with the volatility per transaction, (ii) the near invariance of the distribution of metaorder size and of the volume and number fractions of bets across stocks.
Topics:
Methods:
Market Microstructure
Empirical Analysis
Endogenous Liquidity Crises
arXiv preprint
18 février 2020
Antoine Fosset, J-P Bouchaud, Michael Benzaquen
Empirical data reveals that the liquidity flow into the order book (depositions, cancellations andmarket orders) is influenced by past price changes. In particular, we show that liquidity tends todecrease with the amplitude of past volatility and price trends. Such a feedback mechanism inturn increases the volatility, possibly leading to a liquidity crisis. Accounting for such effects withina stylized order book model, we demonstrate numerically that there exists a second order phasetransition between a stable regime for weak feedback to an unstable regime for strong feedback,in which liquidity crises arise with probability one. We characterize the critical exponents, whichappear to belong to a new universality class. We then propose a simpler model for spread dynamicsthat maps onto a linear Hawkes process which also exhibits liquidity crises. If relevant for thereal markets, such a phase transition scenario requires the system to sit below, but very close tothe instability threshold (self-organised criticality), or else that the feedback intensity is itself timedependent and occasionally visits the unstable region. An alternative scenario is provided by a classof non-linear Hawkes process that show occasional "activated" liquidity crises, without having to bepoised at the edge of instability.
Topics:
Methods:
Market Microstructure, Financial Time-series, Endogenous Crises & Emergent Phenomena
Stochastic Processes, Empirical Analysis
Zooming In on Equity Factor Crowding
arXiv preprint
12 janvier 2020
Valerio Volpati, Michael Benzaquen, Zoltan Eisler, Iacopo Mastromatteo, Bence Toth, J-P Bouchaud
Crowding is most likely an important factor in the deterioration of strategy performance, the increase of trading costs and the development of systemic risk. We study the imprints of crowding on both anonymous market data and a large database of metaorders from institutional investors in the U.S. equity market. We propose direct metrics of crowding that capture the presence of investors contemporaneously trading the same stock in the same direction by looking at fluctuations of the imbalances of trades executed on the market. We identify significant signs of crowding in well known equity signals, such as Fama-French factors and especially Momentum. We show that the rebalancing of a Momentum portfolio can explain between 1–2% of order flow, and that this percentage has been significantly increasing in recent years.
Topics:
Methods:
Financial Time-series, Social Dynamics
Empirical Analysis
Conditional Correlations and Principal Regression Analysis for Futures
arXiv preprint
9 janvier 2020
Armine Karami, Raphael Benichou, Michael Benzaquen, J-P Bouchaud
We explore the effect of past market movements on the instantaneous correlations between assets within the futures market. Quantifying this effect is of interest to estimate and manage the risk associated to portfolios of futures in a non-stationary context. We apply and extend a previously reported method called the Principal Regression Analysis (PRA) to a universe of 84 futures contracts between 2009 and 2019. We show that the past up (resp. down) 10 day trends of a novel predictor -- the eigen-factor -- tend to reduce (resp. increase) instantaneous correlations. We then carry out a multifactor PRA on sectorial predictors corresponding to the four futures sectors (indexes, commodities, bonds and currencies), and show that the effect of past market movements on the future variations of the instantaneous correlations can be decomposed into two significant components. The first component is due to the market movements within the index sector, while the second component is due to the market movements within the bonds sector.
Topics:
Methods:
Financial Time-series
Stochastic Processes, Empirical Analysis
Slow Decay of Impact in Equity Markets: Insights from the ANcerno Database
Market Microstructure and Liquidity
6 août 2019
Frédéric Bucci, Michael Benzaquen, Fabrizio Lillo, J-P Bouchaud
We present an empirical study of price reversion after the executed metaorders. We use a data set with more than 8 million metaorders executed by institutionalinvestors in the US equity market. We show that relaxation takes place as soonas the metaorder ends:while at the end of the same day it is on average ≈2/3 of the peak impact, the decay continues the next days, following a power-law functionat short time scales, and converges to a non-zero asymptotic value at long timescales (∼50 days) equal to ≈1/2 of the impact at the end of the first day. Dueto a significant, multiday correlation of the sign of executed metaorders, a carefuldeconvolution of theobservedimpact must be performed to extract the estimate ofthe impact decay of isolated metaorders.
Topics:
Methods:
Market Microstructure
Empirical Analysis
Impact is not just volatility
Quantitative Finance
4 juillet 2019
Frédéric Bucci, Iacopo Mastromatteo, Michael Benzaquen, J-P Bouchaud
The notion of market impact is subtle and sometimes misinterpreted. Here we argue that impact should not be misconstrued as volatility. In particular, the so-called “square-root impact law”, which states that impact grows as the square-root of traded volume, has nothing to do with price diffusion, i.e. that typical price changes grow as the square-root of time. We rationalise empirical findings on impact and volatility by introducing a simple scaling argument and confronting it to data.
Topics:
Methods:
Market Microstructure, Risk Management
Empirical Analysis
Crossover from Linear to Square-Root Market Impact
Physical Review Letters
14 mars 2019
Frédéric Bucci, Michael Benzaquen, Fabrizio Lillo, J-P Bouchaud
Using a large database of 8 million institutional trades executed in the U.S. equity market, we establish a clear crossover between a linear market impact regime and a square-root regime as a function of the volume of the order. Our empirical results are remarkably well explained by a recently proposed dynamical theory of liquidity that makes specific predictions about the scaling function describing this crossover. Allowing at least two characteristic timescales for the liquidity (“fast” and “slow”) enables one to reach quantitative agreement with the data.
Topics:
Methods:
Market Microstructure, Risk Management
Empirical Analysis
How does latent liquidity get revealed in the limit order book?
Journal of Statistical Mechanics: Theory and Experiment
7 janvier 2019
Lorenzo Dall’Amico, Antoine Fosset, J-P Bouchaud, Michael Benzaquen
Latent order book models have allowed for significant progress in our understanding of price formation in financial markets. In particular they are able to reproduce a number of stylized facts, such as the square-root impact law. An important question that is raised—if one is to bring such models closer to real market data—is that of the connection between the latent (unobservable) order book and the real (observable) order book. Here we suggest a simple, consistent mechanism for the revelation of latent liquidity that allows for quantitative estimation of the latent order book from real market data. We successfully confront our results to real order book data for over a hundred assets and discuss market stability. One of our key theoretical results is the existence of a market instability threshold, where the conversion of latent order becomes too slow, inducing liquidity crises. Finally we compute the price impact of a metaorder in different parameter regimes.
Topics:
Methods:
Market Microstructure, Financial Time-series, Endogenous Crises & Emergent Phenomena
Empirical Analysis
Market impact with multi-timescale liquidity
Quantitative Finance
9 octobre 2017
Michael Benzaquen, J-P Bouchaud
We present an extended version of the recently proposed "LLOB" model for the dynamics of latent liquidity in financial markets. By allowing for finite cancellation and deposition rates within a continuous reaction-diffusion setup, we account for finite memory effects on the dynamics of the latent order book. We compute in particular the finite memory corrections to the square root impact law, as well as the impact decay and the permanent impact of a meta-order. The latter is found to be linear in the traded volume and independent of the trading rate, as dictated by no-arbitrage arguments. In addition, we consider the case of a spectrum of cancellation and deposition rates, which allows us to obtain a square root impact law for moderate participation rates, as observed empirically. Our multi-scale framework also provides an alternative solution to the so-called price diffusivity puzzle in the presence of a long-range correlated order flow.
Topics:
Methods:
Market Microstructure, Financial Time-series, Endogenous Crises & Emergent Phenomena
Empirical Analysis
Topics:
Methods: