Self-organization and phase transition in financial markets with multiple choices

Li-Xin Zhong, Wen-Juan Xu, Ping Huang, Chen-Yang Zhong and Tian Qiu

Papers from arXiv.org

Abstract: Market confidence is essential for successful investing. By incorporating multi-market into the evolutionary minority game, we investigate the effects of investor beliefs on the evolution of collective behaviors and asset prices. When there exists another investment opportunity, market confidence, including overconfidence and under-confidence, is not always good or bad for investment. The roles of market confidence is closely related to market impact. For low market impact, overconfidence in a particular asset makes an investor become insensitive to losses and a delayed strategy adjustment leads to a decline in wealth, and thereafter, one's runaway from the market. For high market impact, under-confidence in a particular asset makes an investor over-sensitive to losses and one's too frequent strategy adjustment leads to a large fluctuation in asset prices, and thereafter, a decrease in the number of agents. At an intermediate market impact, the phase transition occurs. No matter what the market impact is, an equilibrium between different markets exists, which is reflected in the occurrence of similar price fluctuations in different markets. A theoretical analysis indicates that such an equilibrium results from the coupled effects of strategy updating and shift in investment. The runaway of the agents trading a specific asset will lead to a decline in the asset price volatility and such a decline will be inhibited by the clustering of the strategies. A uniform strategy distribution will lead to a large fluctuation in asset prices and such a fluctuation will be suppressed by the decrease in the number of agents in the market. A functional relationship between the price fluctuations and the numbers of agents is found.

Date: 2013-12, Revised 2014-06
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Citations: View citations in EconPapers (3)

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