A NASDAQ MARKET SIMULATION

This pioneering book describes the applications of agent-based modeling to financial markets. It presents a new paradigm for finance, where markets are treated as complex systems whose behavior emerges as a result of interactions of market participants, market institutions, and market rules. This includes both a presentation of the conceptual model and its software implementation. It also summarises the result of the profound research on the successful practical application of this new approach to answer questions regarding the Nasdaq Stock Market's decimalization that was implemented in 2001.

The book presents conceptual foundations for modeling markets as complex systems. It describes the agent-based model of the Nasdaq stock market, including strategies used by market-makers and investors, market participants interactions, and impacts of rules and regulations. It includes analyses of simulation behavior, comparison with the behaviors observed in the real-world markets (existence of fat tails, spread clustering, etc.), and predictions about possible outcomes of decimalization. A framework for calibrating the market behavior and individual market-makers strategies to historical data is also presented.

Contents:

Foresight, Unpredictability and Strategies
Market Dynamics — Analytical Results
Agent-Based Model and Simulation Results
Spread Clustering
Learning, Evolution and Tick Size Effects
Calibration
Phase Transitions in the Market
Validation: After the Decimalization and the Tick-Size Change
Future Developments of the Model

Readership: Financial markets practitioners, academics and business leaders.

“In a telling story of science and politics, Vince and Sasha provide a glimpse of a hopeful future for market regulation. In 1998, they conceived a model to help regulators predict the consequences of proposed new “decimalization” rules for our markets. Pooh-poohed as “politically naïve,” their work was ignored. Eight years later, overwhelming evidence points to its uncanny prescience. Their short book is a “must read” for every thoughtful market regulator, those who question if America is ceding its role as the world's financial market to others, and all who delight in the progress of science.”

Michael Brown
former Chairman of the NASDAQ Stock Market and former CFO of Microsoft

“I watched Vince Darley and Sasha Outkin develop and mature the agent based model of the NASDAQ stock market in our company, BiosGroup, in 1998. The model was carefully crafted and, as noted by the then President of NASDAQ, offered the first quantitative insights into the expected consequences of regulatory change, here for “decimalization rules” for the market. What Darley and Outkin have accomplished foretells an entire new era using agent based models in business, government, the military, and other domains. This book is a critical read for a very wide range of readers attempting to understand the emergent behavior of complex systems that only agent based models can capture. These new tools will prove essential in ways we cannot yet know.”

Stuart Kauffman
Founder of BiosGroup and Director of Institute of Biocomplexity and Informatics
The University of Calgary, Alberta, Canada

168pp		Pub. date: Mar 2007
ISBN: 978-981-270-001-8 981-270-001-3		US$100 / £55

168pp		Pub. date: Mar 2007
ISBN: 978-981-270-835-9(ebook) 981-270-835-9(ebook)		US$130

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