Emergence of Speculation in a Hierarchical Agent-Based Model

The Lux--Marchesi model has been modified to include hierarchical interactions to enable the examination of the effect of hierarchies on the formation of speculative bubbles. The Lux--Marchesi model includes two types of traders:~fundamentalists and chartists, with the latter classified as either optimists or pessimists. The stock is then determined by the number of fundamentalists and chartists (optimists and pessimists) who drive the supply and demand for the stock. Hierarchical interactions are based on communications between traders which successively influence higher levels of the hierarchy up to investment banks, governments, and currency blocks. The combination of the two models reproduces known characteristics of stock markets, including volatility clustering, fat-tailed distributions for short time which become Gaussian at longer times, spontaneous bubbles, and crashes. For certain hierarchy strengths, traders tend to a uniform opinion and an emergence of speculation can be observed. In this regime crashes happen