Re-Exploring the Existence of Arbitrage Opportunity with an Agent-based Artificial Stock Market

Ya-Chi Huang ()
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Ya-Chi Huang: Department of International Business, Lunghwa University of Science and Technology, Taiwan

Journal of Economics and Management, 2014, vol. 10, issue 2, 157-180

Abstract: A number of theoretical studies have explained the existence of arbitrage opportunity with so called ¡§noise traders¡¨ (e.g., De Long et al., 1990; Shleifer and Vishny, 1997; Abreu and Brunnermeier, 2002). In fact, noise traders can create the arbitrage opportunity because they are quite influential in these papers. However, by taking endowments into consideration, the large numbers of noise traders in real markets are not necessarily sufficiently influential. Moreover, theoretical papers assume that investors, apart from the noise traders, have perfect foresight, which is also far away from the situation in real financial markets. By relaxing the strong assumptions of a representative agent and perfect foresight in economics, this paper unravels the puzzle of the existence of arbitrage opportunity based on an agent-based artificial stock market.

Keywords: noise traders; arbitrage opportunity; Agent-Based Computationa Modeling; Santa Fe Artificial Stock Market; Genetic Algorithms (search for similar items in EconPapers)
JEL-codes: C22 C63 G10 (search for similar items in EconPapers)
Date: 2014
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