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Trading behavior and excess volatility in toy markets

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M. Marsili
D. Challet

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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.

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File URL: http://arxiv.org/abs/cond-mat/0004376
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File URL: http://arxiv.org/pdf/cond-mat/0004376
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Paper provided by arXiv.org in its series Quantitative Finance Papers with number cond-mat/0004376.

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Date of creation: Apr 2000
Date of revision: Jun 2000
Handle: RePEc:arx:papers:cond-mat/0004376

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  1. Arthur, W Brian, 1994. "Inductive Reasoning and Bounded Rationality," American Economic Review, American Economic Association, vol. 84(2), pages 406-11, May. [Downloadable!] (restricted)
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  1. Willemien Kets, 2007. "The minority game: An economics perspective," Quantitative Finance Papers 0706.4432, arXiv.org. [Downloadable!]
    Other versions:
  2. Giorgio Fagiolo & Marco Valente, 2004. "Minority Games, Local Interactions, and Endogenous Networks," LEM Papers Series 2004/17, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
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  3. Damien Challet & Tobias Galla, 2005. "Price return autocorrelation and predictability in agent-based models of financial markets," Quantitative Finance, Taylor and Francis Journals, vol. 5(6), pages 569-576, December. [Downloadable!] (restricted)
    Other versions:
  4. Paul Jefferies & Michael Hart & Neil Johnson & P.M. Hui, 2001. "From market games to real-world markets," OFRC Working Papers Series 2001mf02, Oxford Financial Research Centre. [Downloadable!]
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