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Selection mechanisms affect volatility in evolving markets

David Rushing Dewhurst, Michael Vincent Arnold and Colin Michael Van Oort

Papers from arXiv.org

Abstract: Financial asset markets are sociotechnical systems whose constituent agents are subject to evolutionary pressure as unprofitable agents exit the marketplace and more profitable agents continue to trade assets. Using a population of evolving zero-intelligence agents and a frequent batch auction price-discovery mechanism as substrate, we analyze the role played by evolutionary selection mechanisms in determining macro-observable market statistics. In particular, we show that selection mechanisms incorporating a local fitness-proportionate component are associated with high correlation between a micro, risk-aversion parameter and a commonly-used macro-volatility statistic, while a purely quantile-based selection mechanism shows significantly less correlation.

Date: 2018-12, Revised 2019-04
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