Market Impact and Performance of Arbitrageurs of Financial Bubbles in An Agent-Based Model

Rebecca Westphal and Didier Sornette
Additional contact information
Rebecca Westphal: ETH Zurich
Didier Sornette: ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

No 19-29, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We analyse the consequences of predicting and exploiting financial bubbles in an agent-based model, with a risky and a risk-free asset and three different trader types: fundamentalists, noise traders and "dragon riders" (DR). The DR exploit their ability to diagnose financial bubbles from the endogenous price history to determine optimal entry and exit trading times. We study the DR market impact as a function of their wealth fraction. With a proportion of up to 10%, DR are found to have a beneficial effect, reducing the volatility, value-at-risk and average bubble peak amplitudes. They thus reduce inefficiencies and stabilise the market by arbitraging the bubbles. At larger proportions, DR tend to destabilise prices, as their diagnostics of bubbles become increasingly self-referencing, leading to volatility amplification by the noise traders, which destroys the bubble characteristics that would have allowed them to predict bubbles at lower fraction of wealth. Concomitantly, bubble-based arbitrage opportunities disappear with large fraction of DR in the population of traders.

Keywords: financial bubbles; agent-based model; arbitrageurs; prediction; noise traders; fundamen- talists; market impact (search for similar items in EconPapers)
JEL-codes: C53 C73 G01 G17 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2019-06
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3396989 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1929

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().