PROFITABILITY AND MARKET STABILITY: FUNDAMENTALS AND TECHNICAL TRADING RULES

Traders in this simulation of an asset market endogenously select from available information sources in order to maximize expected profits. The information options include two noisy signals of future dividends (the fundamentals) and a simple trend following technical trading rule. Traders use the information for constructing a portfolio to hold through to the next period, consisting of a risky and a risk free asset . Due to free riding on information conveyed in the market price, the technical trading rule proves to be profitable when the market is near the fundamental equilibrium. Popularity of the technical trading rule alters the price dynamics and can move the price away from this equilibrium.The tradersÆ selection of an information source is modeled as a randomized discrete choice. The greater the expected relative benefit of an information source, the greater the probability of its selection. The intensity of choice parameter sets the tradersÆ sensitivity to expected benefits and plays a major role in determining market dynamics. In forming expected benefits of the fundamental information, traders are forward looking using current market observables. The technical trading rule is evaluated based on past performance. Once traders have selected an information source, demand for the risky asset is aggregated within each information source. A price is determined to clear the market.Depending on the intensity of choice setting, computer simulations of the market can result in growth in the popularity of the technical trading rule following a series of correct signals. The larger population of technical traders causes distortions in the market price which may lead to price bubbles. The price bubble contributes to the popularity of the trading rule while simultaneously moving the market further from the fundamental equilibrium. The eventual collapse of the bubble creates windfall profits for the remaining population of fundamental traders while the losses reduce the popularity of the technical trading rule. The market returns to the fundamental equilibrium allowing the cycle to begin again.Two self-fulfilling regimes exist, each resulting in different market dynamics. If traders believe that the distortionary impact the technical traders excerpt on the market price will continue, then the decision concerning information selection and the trading behavior of those who choose to rely on the fundamental information both serve to perpetuate the trading rule and its influence on price. Alternately, if the traders believe that any distortions will soon dissipate, then traders will be attracted to fundamental information when they suspect a deviation from fundamentals. Those selecting to use fundamental information will trade aggressively to exploit the distortion. These behaviors forces the price back towards the fundamental equilibrium. The market has a decreased tendency to develop large price bubbles in the latter regime, but smaller high frequency price oscillations continue. Current efforts include endogenizing the tradersÆ beliefs about which regime is in effect.A second observation addresses the evolutionary development of successful technical trading rules. In a market consisting exclusively of fundamental traders, the only type of technical trading rule which is able to exploit price patterns are trend following rules such as those initially examined. The distortions in price caused by the popularity of a trend following rule creates an environment in which different categories of rules may be useful. A price-dividend rule is examined. Though useless when the market is exclusively fundamental traders, the price dividend rule proves profitable in the market experiencing the distortions caused by the trend following rules.

Self-organization and the persistence of noise in financial markets

A dynamic model of financial markets with learning is demonstrated to produce a self-organized system that displays critical behavior. The price contains private information that traders learn to extract and employ to forecast future value. Since the price reflects the beliefs of the traders, the learning process is self-referencing. As the market learns to correctly extract information from the price, the market deemphasizes private information. Despite the convergence of the model towards the parameters producing efficiency, pricing deviations remain constant due to the increased sensitivity of the price to small errors in information extraction produced by the model's own convergence. © 2006 Elsevier B.V. All rights reserved

Quantum optomechanics of a Bose-Einstein Antiferromagnet

We investigate the cavity optomechanical properties of an antiferromagnetic Bose-Einstein con- densate, where the role of the mechanical element is played by spin-wave excitations. We show how this system can be described by a single rotor that can be prepared deep in the quantum regime under realizable experimental conditions. This system provides a bottom-up realization of dispersive rotational optomechanics, and opens the door to the direct observation of quantum spin fluctuations.Comment: 4 pages, 1 figure, accepted for publication in Physical Review Letters (2011

Market efficiency and learning in an endogenously unstable environment

An informationally inefficiency market is produced without an exogenous source of noise in the price. Fundamental traders acquire private information directly through research. Regression traders employ a learning process to extract the private fundamental information from the public price. The relative popularity between these two strategies evolves based on performance. The model converges towards adoption of regression analysis to the point of creating instability, endogenously producing a noisy price. The lack of a revealing price in the coupled learning and population processes reflects the Grossman and Stiglitz (Amer. Econ. Rev. 70(3)(1980)393) impossibility of informationally efficient markets. © 2004 Elsevier B.V. All rights reserved

Coordinated investing with feedback and learning

This paper introduces assets for which the intrinsic value is endogenous to the amount of funding attracted. A rational expectations equilibrium is developed. Additionally, simulations of the model based on bounded rationality explore the different market behavior under fundamental and momentum based investing strategies. Both strategies produce herding characteristics. The herding under the fundamental strategy approximates the optimal investing of a rational central planner. The momentum strategy results in suboptimal economic development. © 2006 Elsevier B.V. All rights reserved

Mass Transport and Turbulence in Gravitationally Unstable Disk Galaxies. I: The Case of Pure Self-Gravity

The role of gravitational instability-driven turbulence in determining the structure and evolution of disk galaxies, and the extent to which gravity rather than feedback can explain galaxy properties, remains an open question. To address it, we present high resolution adaptive mesh refinement simulations of Milky Way-like isolated disk galaxies, including realistic heating and cooling rates and a physically motivated prescription for star formation, but no form of star formation feedback. After an initial transient, our galaxies reach a state of fully-nonlinear gravitational instability. In this state, gravity drives turbulence and radial inflow. Despite the lack of feedback, the gas in our galaxy models shows substantial turbulent velocity dispersions, indicating that gravitational instability alone may be able to power the velocity dispersions observed in nearby disk galaxies on 100 pc scales. Moreover, the rate of mass transport produced by this turbulence approaches $\sim 1$ $M_\odot$ yr$^{-1}$ for Milky Way-like conditions, sufficient to fully fuel star formation in the inner disks of galaxies. In a companion paper we add feedback to our models, and use the comparison between the two cases to understand what galaxy properties depend sensitively on feedback, and which can be understood as the product of gravity alone. All of the code, initial conditions, and simulation data for our model are publicly available.Comment: 18 pages, 9 figures. Accepted for publication in ApJ. 6.5 TB of simulation data and processed derived data are available at http://dx.doi.org/10.13012/J8F769G