New Economics Papers
on Market Microstructure
Issue of 2014‒05‒04
two papers chosen by
Thanos Verousis

  1. Impact of information cost and switching of trading strategies in an artificial stock market. By Yi-Fang Liu; Wei Zhang; Chao Xu; Jørgen Vitting Andersen; Hai-Chuan Xu
  2. The Effectiveness Of Different Trading Strategies For Price-Takers By Liudmila G. Egorova

  1. By: Yi-Fang Liu (College of Management and Economics, China Center for Social Computing and Analytics and Centre d'Economie de la Sorbonne); Wei Zhang (College of Management and Economics, China Center for Social Computing and Analytics); Chao Xu (College of Management and Economics, China Center for Social Computing and Analytics); Jørgen Vitting Andersen (Centre d'Economie de la Sorbonne); Hai-Chuan Xu (College of Management and Economics, China Center for Social Computing and Analytics)
    Abstract: This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First, we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers.
    Keywords: Agent-based model, heterogeneity, switching behavior, market volatility.
    JEL: G11 G12 G14
    Date: 2014–04
  2. By: Liudmila G. Egorova (National Research University Higher School of Economics)
    Abstract: Simulation models of the stock exchange are developed to explore the dependence between a trader’s ability to predict future price movements and her wealth and probability of bankruptcy, to analyze the consequences of margin trading with different leverage rates and to compare different investment strategies for small traders. We show that in the absence of margin trading the rate of successful predictions should be slightly higher than 50% to guarantee with high probability that the final wealth is greater than the initial and to assure very little probability of bankruptcy, and such a small value explains why so many people try to trade on the stock exchange. However if trader uses margin trading, this rate should be much higher and high rate leads to the risk of excessive losses.
    Keywords: agent-based system, simulation, stock exchange, trading strategies.
    JEL: G02 G17
    Date: 2014

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