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Traders’ long-run wealth in an artificial financial market

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  • Marco Raberto
  • Silvano Cincott
  • Sergio M. Focardi
  • Michele Marchesi

Abstract

In this paper, we study the long-run wealth distribution of agents with different trading strategies in the framework of the Genoa Artificial Stock Market.The Genoa market is an agent-based simulated market able to reproduce the main stylised facts observed in financial markets, i.e., fat-tailed distribution of returns and volatility clustering. Various populations of traders have been introduced in a`thermal bath' made by random traders who make random buy and sell decisions constrained by the available limited resources and depending on past price volatility. We study both trend following and trend contrarian behaviour; fundamentalist traders (i.e., traders believing that stocks have a fundamental price depending on factors external to the market) are also investigated. Results show that the strategy alone does not allow forecasting which population will prevail. Trading strategies yield different results in different market conditions. Generally, in a closed market (a market with no money creation process), we find that trend followers lose relevance and money to other populations of traders and eventually disappear, whereas in an open market (a market with money inflows), trend followers can survive, but their strategy is less profitable than the strategy of other populations. Copyright Kluwer Academic Publishers 2003

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2002 with number 301.

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Date of creation: 01 Jul 2002
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Handle: RePEc:sce:scecf2:301

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Related research

Keywords: artificial financial markets; market simulations; wealth distribution; trading strategies; trading behaviour; asset prices; econophysics;

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References

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  1. LeBaron, Blake, 2000. "Agent-based computational finance: Suggested readings and early research," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 679-702, June.
  2. Raberto, Marco & Cincotti, Silvano & Focardi, Sergio M. & Marchesi, Michele, 2001. "Agent-based simulation of a financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 319-327.
  3. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
  4. H.E. Roman & M. Porto & N. Giovanardi, 2001. "Anomalous scaling of stock price dynamics within ARCH-models," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 21(2), pages 155-158, May.
  5. Zhi-Feng Huang & Sorin Solomon, 2000. "Power, Levy, Exponential and Gaussian Regimes in Autocatalytic Financial Systems," Papers cond-mat/0008026, arXiv.org.
  6. Bouchaud, Jean-Philippe & Mézard, Marc, 2000. "Wealth condensation in a simple model of economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 282(3), pages 536-545.
  7. Zhi-Feng Huang & Sorin Solomon, 2001. "Finite market size as a source of extreme wealth inequality and market instability," Papers cond-mat/0103170, arXiv.org.
  8. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  9. Yanhui Liu & Parameswaran Gopikrishnan & Pierre Cizeau & Martin Meyer & Chung-Kang Peng & H. Eugene Stanley, 1999. "The statistical properties of the volatility of price fluctuations," Papers cond-mat/9903369, arXiv.org, revised Mar 1999.
  10. Lux, T. & M. Marchesi, . "Scaling and Criticality in a Stochastic Multi-Agent Model of a Financial Market," Discussion Paper Serie B 438, University of Bonn, Germany, revised Jul 1998.
  11. repec:att:wimass:9625 is not listed on IDEAS
  12. Cont, Rama & Bouchaud, Jean-Philipe, 2000. "Herd Behavior And Aggregate Fluctuations In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 170-196, June.
  13. repec:att:wimass:9725 is not listed on IDEAS
  14. Rama Cont & Jean-Philippe Bouchaud, 1997. "Herd behavior and aggregate fluctuations in financial markets," Science & Finance (CFM) working paper archive 500028, Science & Finance, Capital Fund Management.
  15. Huang, Zhi-Feng & Solomon, Sorin, 2001. "Finite market size as a source of extreme wealth inequality and market instability," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(3), pages 503-513.
  16. Jean-Philippe Bouchaud & Marc Mezard, 2000. "Wealth condensation in a simple model of economy," Science & Finance (CFM) working paper archive 500026, Science & Finance, Capital Fund Management.
  17. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
  18. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
  19. Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
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Citations

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Cited by:
  1. Alfarano, Simone & Lux, Thomas & Wagner, Friedrich, 2008. "Time variation of higher moments in a financial market with heterogeneous agents: An analytical approach," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 101-136, January.
  2. Marco Raberto & Andrea Teglio & Silvano Cincotti, 2005. "Multi-agent modeling and simulation of a sequential monetary production economy," Computational Economics 0503002, EconWPA.
  3. Derveeuw, Julien & Beaufils, Bruno & Mathieu, Philippe & Brandouy, Olivier, 2007. "Testing double auction as a component within a generic market model architecture," MPRA Paper 4918, University Library of Munich, Germany.
  4. Hynek Lavicka & Tomas Lichard & Jan Novotny, 2014. "Sand in the Wheels or Wheels in the Sand? Tobin Taxes and Market Crashes," CERGE-EI Working Papers wp511, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  5. Victor M. Yakovenko & J. Barkley Rosser, 2009. "Colloquium: Statistical mechanics of money, wealth, and income," Papers 0905.1518, arXiv.org, revised Dec 2009.
  6. Navarro-Barrientos, Jesús Emeterio & Cantero-Álvarez, Rubén & Matias Rodrigues, João F. & Schweitzer, Frank, 2008. "Investments in random environments," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(8), pages 2035-2046.
  7. Sabrina Ecca & Michele Marchesi & Alessio Setzu, 2008. "Modeling and Simulation of an Artificial Stock Option Market," Computational Economics, Society for Computational Economics, vol. 32(1), pages 37-53, September.
  8. J. Emeterio Navarro Barrientos & Frank E. Walter & Frank Schweitzer, 2008. "Risk-Seeking versus Risk-Avoiding Investments in Noisy Periodic Environments," Papers 0801.4305, arXiv.org, revised Sep 2008.
  9. Marco Raberto & Andrea Teglio & Silvano Cincotti, 2008. "Integrating Real and Financial Markets in an Agent-Based Economic Model: An Application to Monetary Policy Design," Computational Economics, Society for Computational Economics, vol. 32(1), pages 147-162, September.
  10. Mannaro, Katiuscia & Marchesi, Michele & Setzu, Alessio, 2008. "Using an artificial financial market for assessing the impact of Tobin-like transaction taxes," Journal of Economic Behavior & Organization, Elsevier, vol. 67(2), pages 445-462, August.
  11. Luisanna Cocco & Giulio Concas & Michele Marchesi, 2014. "Using an Artificial Financial Market for studying a Cryptocurrency Market," Papers 1406.6496, arXiv.org.
  12. Erika Corona & Sabrina Ecca & Michele Marchesi & Alessio Setzu, 2008. "The Interplay Between Two Stock Markets and a Related Foreign Exchange Market: A Simulation Approach," Computational Economics, Society for Computational Economics, vol. 32(1), pages 99-119, September.
  13. Daniel Fricke & Thomas Lux, 2013. "The Effects of a Financial Transaction Tax in an Artificial Financial Market," Kiel Working Papers 1868, Kiel Institute for the World Economy.

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