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Trading volume and market efficiency: an Agent Based Model with heterogenous knowledge about fundamentals

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  • Vivien Lespagnol

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

  • Juliette Rouchier

    ()
    (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)

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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.

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    Bibliographic Info

    Paper provided by Aix-Marseille School of Economics, Marseille, France in its series AMSE Working Papers with number 1419.

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    Length: 35 pages
    Date of creation: May 2014
    Date of revision: May 2014
    Handle: RePEc:aim:wpaimx:1419

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    Web page: http://www.amse-aixmarseille.fr/en
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    Related research

    Keywords: Agent-based modeling; market microstructure; fundamental value; trading volume; _efficient market;

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    19. Te Bao & Cars Hommes & Joep Sonnemans & Jan Tuinstra, 2012. "Individual Expectations, Limited Rationality and Aggregate Outcomes," Tinbergen Institute Discussion Papers 12-016/1, Tinbergen Institute.
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