The Toll of Subrational Trading in an Agent Based Economy
AbstractIn an agent-based exchange economy, we measure the loss of wealth for rational agents due to the presence of varying proportions of subrational (boundedly rational) traders that do not know all the needed parameters. We consider two departures from rationality: M-traders use private, stochastic and unbiased signals to build an estimate of the value of the risky asset; chartists only use the last observed price. The exchange takes place using a realistic continuous double auction. We show by numerical simulations that M-traders? subrational behavior does not reduce the wealth of the rational agents. On the contrary, a sizable fraction of chartists can lead to mispricing of the risky asset and to a reduction of the wealth share of the rational traders. Moreover, as chartists perceive a higher wealth than the others, due to wrong estimates of the fundamental value, their fraction in the market may not dissolve in the long run.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 217.
Date of creation: 01 Mar 2008
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risk sharing; boundedly rationality; cost of subrational trading; agent-based markets;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-05 (All new papers)
- NEP-CBE-2008-05-05 (Cognitive & Behavioural Economics)
- NEP-CMP-2008-05-05 (Computational Economics)
- NEP-DGE-2008-05-05 (Dynamic General Equilibrium)
- NEP-MST-2008-05-05 (Market Microstructure)
- NEP-UPT-2008-05-05 (Utility Models & Prospect Theory)
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