Self-reinforcing feedback loop in financial markets with coupling of market impact and momentum traders
Authored by Tian Qiu, Li-Xin Zhong, Wen-Juan Xu, Rong-Da Chen, Chen-Yang Zhong, Fei Ren, Yun-Xing He
Date Published: 2018
DOI: 10.1016/j.physa.2017.10.045
Sponsors:
Chinese National Natural Science Foundation
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Model Documentation:
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Abstract
By incorporating market impact and momentum traders into an agent-based
model, we investigate the conditions for the occurrence of
self-reinforcing feedback loops and the coevolutionary mechanism of
prices and strategies. For low market impact, the price fluctuations are
originally large. The existence of momentum traders has little impact on
the change of price fluctuations but destroys the equilibrium between
the trend-following and trend-rejecting strategies. The trend-following
herd behaviors become dominant. A self-reinforcing feedback loop exists.
For high market impact, the existence of momentum traders leads to an
increase in price fluctuations. The trend-following strategies of
rational individuals are suppressed while the trend-following strategies
of momentum traders are promoted. The crowd-anticrowd behaviors become
dominant. A negative feedback loop exists. A theoretical analysis
indicates that, for low market impact, the majority effect is beneficial
for the trend-followers to earn more, which in turn promotes the
trend-following strategies. For high market impact, the minority effect
causes the trend-followers to suffer great losses, which in turn
suppresses the trend-following strategies. (C) 2017 Elsevier B.V. All
rights reserved.
Tags
Cooperation
econophysics
time-series
minority game
Volatility
Organization
Stock-market
Reversal
Ising-model
Trading efficiency
Momentum traders
Self-reinforcing
feedback
Real-estate bubble
Price fluctuations