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Trading Volume and Market Efficiency: An Agent Based Model with Heterogenous Knowledge about Fundamentals

Vivien Lespagnol () and Juliette Rouchier ()
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Vivien Lespagnol: GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper studies the effect of investor's bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are exchanged. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor's demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader's belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the unknown fundamental has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.

Keywords: fundamental value; market microstructure; agent-based modeling; trading volume; efficient market (search for similar items in EconPapers)
Date: 2014-05
New Economics Papers: this item is included in nep-cmp, nep-hme and nep-mst
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Working Paper: Trading volume and market efficiency: an Agent Based Model with heterogenous knowledge about fundamentals (2014) Downloads
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