Market Ecology: Trading Strategies and Market Volatility

Kun Xing and Honggang Li ()
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Kun Xing: Beijing Normal University
Honggang Li: Beijing Normal University

Computational Economics, 2024, vol. 64, issue 6, No 8, 3333-3351

Abstract: Abstract The value strategy and technical analysis strategy have existed in the financial market for a long time, and the impact of these two types of strategies on the financial market has also been debated for a long time. This paper studies the impact of trading strategies on market volatility by constructing a market ecology model including the simple technical strategy and value strategy. The results show that both the nature and the population size of a trading strategy can affect market volatility. In a market composed of the trend-following strategy and the value strategy, when the populations of the two strategies match, market volatility is low; when either of the two strategies has too much population, market volatility is high. However, in a market composed of the trend-reversal strategy and the value strategy, there is a positive correlation between market volatility and the population size of each strategy. The comparison of these results suggests that substantial diversification of trading strategies may be a fundamental force for market stability.

Keywords: Market ecology; Trading strategies; Market volatility; Artificial market (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s10614-024-10562-z

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