Modelling financial markets with agents competing on different time scales and with different amount of information

Johannes Wohlmuth and Jørgen Vitting Andersen

Physica A: Statistical Mechanics and its Applications, 2006, vol. 363, issue 2, 459-468

Abstract: We use agent-based models to study the competition among investors who use trading strategies with different amount of information and with different time scales. We find that mixing agents that trade on the same time scale but with different amount of information has a stabilizing impact on the large and extreme fluctuations of the market. Traders with the most information are found to be more likely to arbitrage traders who use less information in the decision making. On the other hand, introducing investors who act on two different time scales has a destabilizing effect on the large and extreme price movements, increasing the volatility of the market. Closeness in time scale used in the decision making is found to facilitate the creation of local trends. The larger the overlap in commonly shared information the more the traders in a mixed system with different time scales are found to profit from the presence of traders acting at another time scale than themselves.

Keywords: Agent based models; Multi time scale phenomena; Hedge funds (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:363:y:2006:i:2:p:459-468

DOI: 10.1016/j.physa.2005.08.067

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