Micro and macro benefits of random investments in financial markets

Abstract

In this paper, making use of recent statistical physics techniques and models, we address the specific role of randomness in financial markets, both at the micro and the macro level. In particular, we review some recent results obtained about the effectiveness of random strategies of investment, compared with some of the most used trading strategies for forecasting the behaviour of real financial indexes. We also push forward our analysis by means of a self-organised criticality model, able to simulate financial avalanches in trading communities with different network topologies, where a Pareto-like power law behaviour of wealth spontaneously emerges. In this context, we present new findings and suggestions for policies based on the effects that random strategies can have in terms of reduction of dangerous financial extreme events, i.e. bubbles and crashes.

Keywords:

• random strategies
• econophysics
• behavioural finance
• expectations
• nonlinear dynamics
• financial markets

Acknowledgements

We would like to thank Dirk Helbing for many fruitful discussions and for his contributions to the research project to which this paper belongs.

Notes

1 Please note that the final distribution of the capital of random traders obtained here differs from the exponential one found in Ref. [32] because there we did not endow all the agents with exactly the same amounts of 1000 credits, but we considered an initial Gaussian distribution with an average value of 1000 credits.