| 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 |
| URL: |
http://d.repec.org/n?u=RePEc:mse:cesdoc:14031&r=mst |