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, 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, https://centredeconomiesorbonne.univ-paris1.fr
Hai-Chuan Xu: College of Management and Economics, China Center for Social Computing and Analytics

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

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 (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-04
New Economics Papers: this item is included in nep-cta, nep-fmk, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14031

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