Computational Economics

, Volume 32, Issue 1–2, pp 99–119 | Cite as

The Interplay Between Two Stock Markets and a Related Foreign Exchange Market: A Simulation Approach

  • Erika Corona
  • Sabrina Ecca
  • Michele Marchesi
  • Alessio Setzu
Article
First Online:
Received:
Accepted:

Abstract

There is still much that is unknown about the interactions among financial markets, and about the relationships between stock prices and exchange rates. This topic gains attention during financial crises, and many papers try to find empirical regularities emerging from financial data, or to study contagion processes. In this paper we present a study on the interplay between two stock markets and one foreign exchange market extending the framework provided by the Genoa Artificial Stock Market. There are four different trading strategies, and the agents are divided into two groups: those who trade in the stock markets and those who trade in the FOREX. We studied three market conditions: the FOREX dynamics, the behavior of the two stock markets together with the FOREX, and finally we conducted a what-if analysis for testing the effects of a inflationary monetary shock of one currency affecting all of the three markets.

Keywords

Agent-based computational economics Foreign exchange markets Financial market simulation 

JEL classification

D53 
This is a preview of subscription content, log in to check access.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Boyer, B. H., Gibson, M. S., & Loretan, M. (1997). Pitfalls in tests for changes in correlations. Technical report.Google Scholar
  2. Butler K.C., Joaquin D.C. (2002) Are the gains from international portfolio diversification exaggerated? the influence of downside risk in bear markets. Journal of International Money and Finance 21(7): 981–1011CrossRefGoogle Scholar
  3. Cincotti S., Focardi S.M., Marchesi M., Raberto M. (2003) Who wins? study of long-run trader survival in an artificial stock market. Physica A 324(1–2): 227–233CrossRefGoogle Scholar
  4. Corsetti, G., Pericoli, M., & Sbracia, M. (2001). Correlation analysis of financial contagion: What one should know before running a test. Working paper, Economic Growth Center, Yale University, Apr. 2001.Google Scholar
  5. De Grauwe P., Grimaldi M. (2005) Heterogeneity of agents, transactions costs and the exchange rate. Journal of Economic Dynamics and Control 29(4): 691–719CrossRefGoogle Scholar
  6. Eichengreen, B., Rose, A. K., & Wyplosz, C. (1996). Contagious currency crises. Cepr discussion papers, C.E.P.R. Discussion Papers, Aug. 1996.Google Scholar
  7. Faust, J., Rogers, J. H., & Wright, J. H. (2001). Exchange rate forecasting: the errors we’ve really made. International Finance Discussion Papers 714, Board of Governors of the Federal Reserve System (U.S.).Google Scholar
  8. Flood R.P., Rose A.K. (1995) Fixing exchange rates: A virtual quest for fundamentals. Journal of Monetary Economics 36(1): 3–37CrossRefGoogle Scholar
  9. Forbes K.J. (2004) The asian flu and russian virus: the international transmission of crises in firm-level data. Journal of International Economics 63(1): 59–92CrossRefGoogle Scholar
  10. Forbes K.J., Rigobon R. (2002) No contagion, only interdependence: Measuring stock market comovements. The Journal of Finance LVII(5): 2223–2261CrossRefGoogle Scholar
  11. Goodhart, C. (1990). News and the foreign exchange market. Fmg discussion papers, Financial Markets Group, Jan. 1990.Google Scholar
  12. Goodhart C., Figliuoli L. (1991) Every minute counts in the foreign exchange markets. Journal of International Money and Finance 10: 23–52CrossRefGoogle Scholar
  13. Hamao Y., Masulis R.W., Ng V. (1990) Correlations in price changes and volatility across international stock markets. Review of Financial Studies 3(2): 281–307CrossRefGoogle Scholar
  14. Izumi, K., & Ueda, K. (1999a). Analysis of dealers’ processing financial news based on an artificial market approach. Journal of Computational Intelligence in Finance,(7): 23–33.Google Scholar
  15. Izumi K., & Ueda, K. (1999b). Analysis of exchange rate scenarios using an artificial market approach. In C.-H. Chen, A. Amin, et al. (Eds.), Proceedings of the International Conference on Artificial Intelligence(pp. 360–366). CSREA Press.Google Scholar
  16. Izumi K., Ueda K. (2001) Phase transition in a foreign exchange market-analysis based on an artificial market approach. IEEE Transactions on Evolutionary Computation 5(5): 456–470CrossRefGoogle Scholar
  17. Loretan, M., & English, W. B. (2000). Evaluating "correlation breakdowns" during periods of market volatility. Technical report.Google Scholar
  18. Lui Y.-H., Mole D. (1998) The use of fundamental and technical analyses by foreign exchange dealers: Hong kong evidence. Journal of International Money and Finance 17(3): 535–545CrossRefGoogle Scholar
  19. Mannaro, K., Marchesi, M., & Setzu, A. (2006). Using an artificial financial market for assessing the impact of tobin-like transaction taxes. Submitted to Journal of Economic Behavior & Organization.Google Scholar
  20. Marchesi, M., Cincotti, S. , Focardi, S. M., & Raberto, M. (2003). The Genoa artificial stock market: microstructure and simulation, volume 521 of Lecture notes in economics and mathematical systems (pp. 277–289). Springer, Feb. 2003.Google Scholar
  21. Menkhoff L. (1997) Examining the use of technical currency analysis. International Journal of Finance & Economics 2(4): 307–318CrossRefGoogle Scholar
  22. Obstfeld, M., & Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause? Nber working papers, National Bureau of Economic Research, Inc., July 2000.Google Scholar
  23. Raberto M., Cincotti S. (2005) Modeling and simulation of a double auction artificial financial market. Physica A, 355(1): 34–45CrossRefGoogle Scholar
  24. Raberto M., Cincotti S., Focardi S.M., Marchesi M. (2001) Agent-based simulation of a financial market. Physica A 219: 319–327CrossRefGoogle Scholar
  25. Raberto M., Cincotti S., Focardi S., Marchesi M. (2003) Traders’ long-run wealth in an artificial financial market. Computational Economics 22(2–3): 255–272CrossRefGoogle Scholar
  26. Westerhoff F., Wieland C. (2005) Exchange rate dynamics, central bank interventions and chaos control methods. Journal of Economic Behavior & Organization 58: 117–132CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  • Erika Corona
    • 1
  • Sabrina Ecca
    • 1
  • Michele Marchesi
    • 1
  • Alessio Setzu
    • 1
  1. 1.Department of Electric and Electronic EngineeringUniversity of CagliariCagliariItaly

Personalised recommendations