Trading Volume and Price Distortion: An Agent-Based Model with Heterogenous Knowledge of Fundamentals
Authored by Vivien Lespagnol, Juliette Rouchier
Date Published: 2018
DOI: 10.1007/s10614-017-9655-y
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Abstract
This paper investigates whether trading volume and price distortion can
be explained by the investor's bounded rationality. Assuming that agents
are bounded by their information access and processing, what are the
consequences on market dynamics? We expose the result of simulations in
an ABM that considers the liquidity as an endogenous characteristic of
the market and allows to design investors as bounded rational. In a call
auction market, where two risky assets are exchanged, traders are
defined as a mix between fundamentalist and trend-follower outlook. Each
one differs as to behaviour, order-placement strategy, mood, knowledge,
risk-aversion and investment horizon. We place agents in a context of
evolving fundamental values and order placement strategy; they perceive
the fundamental but they also have some heterogeneous belief
perseverance; and they adapt their orders to the market depth so as to
maximise their execution probability and their profit. By adding bounded
rationality in their information processing, we show that (1) usual
features as trend-follower outlook and heterogeneous investment horizon
are important features to generate excess volatility of asset prices and
market inefficiency; (2) the learning fundamental value stabilises the
market price and the trading volume; (3) the order-placement strategy
increases trading volume, but reduces market efficiency and stability;
(4) the agent's mood prevents illiquid market and weakly increases the
market volatility as classical noise trader agents; (5) the impatience
to sell of traders is always present in the market: the market sell
orders are always more numerous than the market buy orders.
Tags
Agent-based modelling
behavior
Dynamics
Liquidity
market microstructure
finance
Expectations
Stock-market
Traders
Long-memory
Order-driven market
Fundamental value
Trading
volume
Efficient market
Transparency