Impact of information cost and switching of trading strategies in an artificial stock market

Yi-Fang Liu (), Wei Zhang, Chao Xu (), Jørgen Vitting Andersen () and Hai-Chuan Xu
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Yi-Fang Liu: College of Management and Economics - TJU - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Wei Zhang: College of Management and Economics - TJU - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University
Chao Xu: College of Management and Economics - TJU - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University
Jørgen Vitting Andersen: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique
Hai-Chuan Xu: College of Management and Economics - TJU - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University

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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; Modèle agents; hétérogénéité; Comportement de commutation; volatilité du marché boursier (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-cna, nep-cta and nep-mst
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00983051
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Citations: View citations in EconPapers (4)

Published in 2014

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