Additional information is available for the following registered author(s):

• Leanne J. Ussher

Price volatility and trader wealth are explored for different margin requirements and transaction taxes. It appears that margins and transaction costs help procreate large traders who adopt the behavior of “market makers†imposing a spread on their buying and selling. The dominance of the market by a few large traders both reduces local price variation about the mean but increases extreme price movements, and hence overall kurtosis of returns.

These large traders influence prices and can promote the prevalence of multiple equilibria in the market, which adds to price volatility and compromises market efficiency. The possibility for multiple equilibria is due to the margin account which is valued in the speculative futures market simultaneously with trader positions due to real time gross settlement. This creates a positive feedback between agent wealth and prices. Walrasian clearing limits such destabilizing trades that may arise from margin calls in times of market stress. But this kind of volatility increases when market speculator expectations are not uniform and/or individual traders become large relative to the market.

In this simple stochastic price model, where all traders have minimal intelligence, lucky traders can grow into large traders and persist for a medium length of time, beyond what their knowledge deserves. Trader wealth distributions become skewed and usually have power law tails. This tendency for large traders to emerge appears to exist regardless of market size. Cumulative tendencies, due to the leverage opportunities from margins and existence of transaction costs on trading, appear to reduce the competitiveness of the market.

The setting of the margin requirement by an exchange is shown to affect the prevalence of large traders. Large traders and extreme price movements appear to be less in either a very low or very high leveraged market. Furthermore, transaction taxes increase local variation of price movements, although they may reduce larger price movements in low levered markets. This artificially generated market provisionally identifies some potentially tractable optimal exchange policy, supportive of more stable and competitive trading rules

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Publisher Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 434.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 11 Nov 2005
Date of revision:
Handle: RePEc:sce:scecf5:434

Contact details of provider:
Email:
Web page: http://comp-econ.org/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).

Related research

Keywords: Agent Based Model; Margins; futures; speculation;

Find related papers by JEL classification:
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

Statistics

Access and download statistics

Did you know? IDEAS indexes over 800000 items of research in Economics alone.

This page was last updated on 2009-11-27.