Trading volume and market efficiency: an Agent Based Model with heterogenous knowledge about fundamentals

Vivien Lespagnol () and Juliette Rouchier ()
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Vivien Lespagnol: Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS, http://greqam.fr/en/users/lespagnol#profile-doctorants

No 1419, AMSE Working Papers from Aix-Marseille School of Economics, France

Abstract: This paper studies the effect of investor’s bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are exchanged. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor’s demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader’s belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the unknown fundamental has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.

Keywords: Agent-based modeling; market microstructure; fundamental value; trading volume; _efficient market (search for similar items in EconPapers)
JEL-codes: C63 D44 G12 G14 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-05, Revised 2014-05
New Economics Papers: this item is included in nep-cfn, nep-cmp, nep-hme, nep-mst, nep-ore and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Trading Volume and Market Efficiency: An Agent Based Model with Heterogenous Knowledge about Fundamentals (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:aim:wpaimx:1419

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