Analyzing herding, stylized facts, and information cascades via self-organized criticality in an agent-based speculation game

Abstract

This study advances Kai Katahira’s Speculation Game, an agent-based model (ABM) for financial markets, by addressing its limitation in capturing order flow imbalance, a critical indicator of herd behavior. Although the original model successfully replicated key stylized facts of financial markets, it did not account for the persistence of order imbalance observed in real-world trading. Through a comprehensive analysis of two decades of BSE Sensex data, we establish the prevalence of order imbalance and its correlation with price fluctuations. To bridge this gap, we propose an extended model, Speculation Game with Information Cascade (SGIC), which integrates Self-Organized Criticality (SOC) through a sand-pile model, enabling agents to interact within a small-world network. Our proposed model not only reproduces the stylized facts captured by the original Speculation Game, but also successfully generates the additional stylized fact of order flow imbalance. These advances enhance the realism of ABMs in financial markets, providing deeper insights into the mechanisms driving herding and market fluctuations.