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The Survival of Stabilizing Strategies and the Dynamics of Financial Prices

Speaker: Blake LeBaron
Brandeis University

April 26, 2012 - 4:00 p.m. to 5:00 p.m.
Location: DCC 308
Hosted By: Dr. Sanmay Das (x2782), Dr. Aparna Gupta (x2757)


Financial price series often take long swings from reasonable valuation levels (often called fundamental values). Explaining these deviations, and the predictability of returns that they imply, has been a challenge for the academic finance community. This talk will address this issue in a computational, heterogeneous agent-based model, populated with evolving and competing strategies. These computational experiments quantitatively replicate many interesting features common to all asset price series. They also allow for a look "under the hood" at what is happening in terms of which forecasting rules traders are using, and which are becoming more or less dominant in the overall population of traders. Strategies that bet on a reversion to fundamental values serve as a calming force in these markets. It will be shown that they are not able to gain a very large fraction of wealth, and the reason for this is due to the timing of their trades and how it exposes them to a large amount of perceived risk. They are hesitant to buy into a falling market, because they correctly perceive increases in volatility as prices fall. This result will be connected to what we know about the overall stability and efficiency of financial markets.

Short Bio:

Blake LeBaron has a Ph.D. in Economics from the University of Chicago. He is the Abram L. and Thelma Sachar Chair of International Economics at the International Business School, Brandeis University. He is a Research Associate at the National Bureau of Economic Research, and was a Sloan Fellow. LeBaron also served as director of the Economics Program at The Santa Fe Institute in 1993.

LeBaron's research has concentrated on the issue of nonlinear behavior of financial and macroeconomic time series. He has been influential both in the statistical detection of nonlinearities and in describing their qualitative behavior in many series. LeBaron's current interests are in understanding the quantitative dynamics of interacting systems of adaptive agents and how these systems replicate observed real world phenomenon. Also, LeBaron is interested in understanding some of the observed behavioral characteristics of traders in financial markets. This behavior includes strategies such as technical analysis and portfolio optimization, along with policy questions such as foreign exchange intervention. In general, he seeks to find out the empirical implications of learning and adaptation as applied to finance and macroeconomics.

Last updated: April 17, 2012