Trading behavior and excess volatility in toy markets

M. Marsili and Damien Challet

Papers from arXiv.org

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 {\em i)} the neglect of market impact implicit in price taking behavior and of {\em 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.

Date: 2000-04, Revised 2000-06
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Journal Article: TRADING BEHAVIOR AND EXCESS VOLATILITY IN TOY MARKETS (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:cond-mat/0004376

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