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Herding effects in order driven markets: The rise and fall of gurus

Listed author(s):
  • Tedeschi, Gabriele
  • Iori, Giulia
  • Gallegati, Mauro

We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure evolves endogenously via a fitness mechanism based on agents performance. We assess under which assumptions imitation, among noise traders, can give rise to the emergence of gurus and their rise and fall in popularity over time. We study the wealth distribution of gurus, followers and non followers and show that traders have an incentive to imitate and a desire to be imitated since herding turns out to be profitable. The model is then used to study the effect that different competitive strategies (i.e. chartist & fundamentalist) have on agents performance. Our findings show that positive intelligence agents cannot invade a market populated by noise traders when herding is high.

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File URL: http://www.sciencedirect.com/science/article/pii/S0167268111002344
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Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 81 (2012)
Issue (Month): 1 ()
Pages: 82-96

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Handle: RePEc:eee:jeborg:v:81:y:2012:i:1:p:82-96
DOI: 10.1016/j.jebo.2011.09.006
Contact details of provider: Web page: http://www.elsevier.com/locate/jebo

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