Jozef Barunik, PhDr. and Lukas Vacha, PhD. Econometric, Academy of Sciences of the Czech Republic, Pod Vodarenskou vezi 4,, Prague, 18208, Czech Republic
In this paper we extended the original simulations of heterogeneous agent model by introducing smart traders and dynamics of the agents’ sentiment. The idea of the smart traders is based on endeavor of the market agents to estimate the future price movements. By adding smart traders and sentiment changes we try to improve the original heterogeneous agent model so it will be able to come to closer description of the real markets. The main result of the simulations is that probability distribution functions of the price deviation changes significantly with adding smart traders to the model, and it also changes significantly with introduction of the sentiment changes. We also simulate markets with different intensity of choice which can be perceived as a measure of rationality in the model. We use Hurst exponent to measure the persistence of the price deviations and we find that the Hurst exponent is significantly increasing with smart traders in simulations. This means that the introduction of smart trader concept into the model results in significantly higher persistence of the simulated price deviations. On the other hand, introduction of changing sentiment in the proposed form does not change the persistence of simulated prices significantly.