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Christian-Albrechts-Universität zu Kiel

Institut für Volkswirtschaftslehre - Department of Economics
Economics Working Papers

Economics Working Papers: Abstract 2009-09


Nummer

2009-09

Autoren

Simone Alfarano, Mishael Milakovic, Matthias Raddant

 

Titel

 

Network Hierarchy in Kirman’s Ant Model: Fund Investment Can Create Systemic Risk
Abstract Kirman’s “ant model” has been used to characterize the expectation formation of financial investors who are prone to herding. The model’s original version suffers from the problem of N-dependence: its ability to replicate the statistical features of financial returns vanishes once the system size N is increased. In a generalized version of the ant model, the network structure connecting agents turns out to determine whether or not the model is N-dependent. We investigate a class of hierarchical networks in the generalized model that presumably reflect the institutional heterogeneity of financial markets. These network structures do overcome the problem of N-dependence, but at the same time they also increase system-wide volatility. Thus network structure becomes an auxiliary source of volatility in addition to the behavioral heterogeneity of interacting agents.

Keywords: herding, financial markets, networks, N-dependence, systemic risk

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