TRADER SPECIES WITH DIFFERENT DECISION STRATEGIES AND PRICE DYNAMICS IN FINANCIAL MARKETS: AN AGENT-BASED MODELING PERSPECTIVE

Wei Zhang (), Gen Li (), Xiong Xiong () and Yong Jie Zhang ()
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Wei Zhang: School of Management, Tianjin University, Tianjin 300072, China;
Gen Li: School of Management, Tianjin University, Tianjin 300072, China
Xiong Xiong: School of Management, Tianjin University, Tianjin 300072, China
Yong Jie Zhang: School of Management, Tianjin University, Tianjin 300072, China

International Journal of Information Technology & Decision Making (IJITDM), 2010, vol. 09, issue 02, 327-344

Abstract: Investors with different trading strategies can be viewed as different "species" in financial markets. Since the asset price is ultimately determined by the individual trading decisions, the combination and evolution of different trader species in financial market ecology will have great impact to the price dynamics. Considering the limitations and shortcomings of traditional analytical approaches in financial economics in dealing with this issue, an agent-based computational model is introduced in this paper. With the co-existence of 3-type trader species that make different decisions based on their own beliefs and constrains, it is found that although rational speculation destabilizes the price process with the presence of positive feedback strategy, as suggested in the literature, introducing extra noise trading behavior to the market will make the price process back to a more stationary situation, meaning that the market will be healthier if more diversified trader species co-exist in the markets.

Keywords: Trading decision; trader species; financial market; asset pricing; agent-based modeling (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219622010003841

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