TRADER SPECIES WITH DIFFERENT DECISION STRATEGIES AND PRICE DYNAMICS IN FINANCIAL MARKETS: AN AGENT-BASED MODELING PERSPECTIVE

Authored by Wei Zhang, Gen Li, Xiong Xiong, Yong Jie Zhang

Date Published: 2010-03

DOI: 10.1142/s0219622010003841

Sponsors: Chinese National Natural Science Foundation

Platforms: Swarm

Model Documentation: Other Narrative Flow charts Mathematical description

Model Code URLs: Model code not found

Abstract

Investors with different trading strategies can be viewed as different “species” in financial markets. Since the asset price is ultimately determined by the individual trading decisions, the combination and evolution of different trader species in financial market ecology will have great impact to the price dynamics. Considering the limitations and shortcomings of traditional analytical approaches in financial economics in dealing with this issue, an agent-based computational model is introduced in this paper. With the co-existence of 3-type trader species that make different decisions based on their own beliefs and constrains, it is found that although rational speculation destabilizes the price process with the presence of positive feedback strategy, as suggested in the literature, introducing extra noise trading behavior to the market will make the price process back to a more stationary situation, meaning that the market will be healthier if more diversified trader species co-exist in the markets.

Tags

Agent-based modeling Asset pricing Financial market Trading decision trader species