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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
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
Date of revision:
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)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- LiCalzi, Marco & Pellizzari, Paolo, 2007.
"Simple market protocols for efficient risk sharing,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 31(11), pages 3568-3590, November.
- Marco LiCalzi & Paolo Pellizzari, 2005. "Simple market protocols for efficient risk sharing," Finance 0504019, EconWPA.
- Marco LiCalzi & Paolo Pellizzari, 2006. "Simple Market Protocols for Efficient Risk Sharing," Working Papers 136, Department of Applied Mathematics, Università Ca' Foscari Venezia.
- Day, Richard H. & Huang, Weihong, 1990.
"Bulls, bears and market sheep,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 14(3), pages 299-329, December.
- Xue-Zhong (Tony) He & Carl Chiarella, 2001.
"Asset Price and Wealth Dynamics under Heterogeneous Expectations,"
CeNDEF Workshop Papers, January 2001
5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
- Carl Chiarella & Xue-Zhong He, 2001. "Asset Price and Wealth Dynamics Under Heterogeneous Expectations," Research Paper Series 56, Quantitative Finance Research Centre, University of Technology, Sydney.
- Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
- Chan, Louis K C & Jegadeesh, Narasimhan & Lakonishok, Josef, 1996. " Momentum Strategies," Journal of Finance, American Finance Association, vol. 51(5), pages 1681-1713, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford).
If references are entirely missing, you can add them using this form.