TRADING BEHAVIOR AND EXCESS VOLATILITY IN TOY MARKETS

Matteo Marsili () and Damien Challet
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Matteo Marsili: Istituto Nazionale per la Fisica della Materia (INFM), Trieste-SISSA Unit, V. Beirut 2-4, Trieste I-34014, Italy

Advances in Complex Systems (ACS), 2001, vol. 04, issue 01, 3-17

Abstract: We study the relation between the trading behavior of agents and volatility in toy markets of adaptive inductively rational agents. We show that excess volatility, in such simplified markets, arises as a consequence of (i) the neglect of market impact implicit in price taking behavior and of (ii) excessive reactivity of agents. These issues are dealt with in detail in the simple case without public information. We also derive, for the general case, the critical learning rate above which trading behavior leads to turbulent dynamics of the market.

Keywords: Statistical mechanics; El Farol bar problem; minority games; market impact; adaptive learning (search for similar items in EconPapers)
Date: 2001
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Working Paper: Trading behavior and excess volatility in toy markets (2000)
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DOI: 10.1142/S0219525901000024

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