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Examining the effectiveness of price limits in an artificial stock market

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  • Yeh, Chia-Hsuan
  • Yang, Chun-Yi
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    Abstract

    This paper proposes an agent-based framework to examine the effectiveness of price limits in an artificial stock market. The market is composed of many boundedly rational and heterogeneous traders whose learning behavior is represented by a genetic programming algorithm. We calibrate the model to replicate several stylized facts observed in real financial markets. Based on this environment, the impacts of price limits are analyzed from the perspectives of volatility, price distortion, volume, and welfare. We find that the imposition of price limits possesses both positive and negative effects. However, compared with the market without price limits, appropriate price limits help to reduce volatility and price distortion, and increase the liquidity and welfare.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2089-2108

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    Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:2089-2108

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Price limits Artificial stock market Agent-based modeling Genetic programming;

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    Cited by:
    1. Westerhoff, Frank & Franke, Reiner, 2012. "Agent-based models for economic policy design: Two illustrative examples," BERG Working Paper Series 88, Bamberg University, Bamberg Economic Research Group.
    2. Xiangyi Meng & Jian-Wei Zhang & Jingjing Xu & Hong Guo, 2014. "Quantum spatial-periodic harmonic model for daily price-limited stock markets," Papers 1405.4490, arXiv.org.
    3. Manahov, Viktor & Hudson, Robert, 2013. "Herd behaviour experimental testing in laboratory artificial stock market settings. Behavioural foundations of stylised facts of financial returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4351-4372.

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