Coupled effects of market impact and asymmetric sensitivity in financial markets
By incorporating market impact and asymmetric sensitivity into the evolutionary minority game, we study the coevolutionary dynamics of stock prices and investment strategies in financial markets. Both the stock price movement and the investors' global behavior are found to be closely related to the phase region they fall into. Within the region where the market impact is small, investors' asymmetric response to gains and losses leads to the occurrence of herd behavior, when all the investors are prone to behave similarly in an extreme way and large price fluctuations occur. A linear relation between the standard deviation of stock price changes and the mean value of strategies is found. With full market impact, the investors tend to self-segregate into opposing groups and the introduction of asymmetric sensitivity leads to the disappearance of dominant strategies. Compared with the situations in the stock market with little market impact, the stock price fluctuations are suppressed and an efficient market occurs. Theoretical analyses indicate that the mechanism of phase transition from clustering to self-segregation in the present model is similar to that in the majority-minority game and the occurrence and disappearance of efficient markets are related to the competition between the trend-following and the trend-aversion forces. The clustering of the strategies in the present model results from the majority-wins effect and the wealth-driven mechanism makes the market become predictable.
References listed on IDEAS
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.:
- Challet, Damien, 2008.
"Inter-pattern speculation: Beyond minority, majority and $-games,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 32(1), pages 85-100, January.
- Damien Challet, 2005. "Inter-pattern speculation: beyond minority, majority and $-games," Finance 0503006, EconWPA.
- Ren, Fei & Zhong, Li-Xin, 2012. "The price impact asymmetry of institutional trading in the Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(8), pages 2667-2677.
- Alfi, V. & De Martino, A. & Pietronero, L. & Tedeschi, A., 2007. "Detecting the traders’ strategies in minority–majority games and real stock-prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 1-8.
- Yan-Bo Xie & Bing-Hong Wang & Chin-Kun Hu & Tao Zhou, 2005. "Global optimization of minority game by intelligent agents," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 47(4), pages 587-593, October.
- Johnson, N.F. & Jarvis, S. & Jonson, R. & Cheung, P. & Kwong, Y.R. & Hui, P.M., 1998. "Volatility and agent adaptability in a self-organizing market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 258(1), pages 230-236.
- Esteban Moro & Javier Vicente & Luis G. Moyano & Austin Gerig & J. Doyne Farmer & Gabriella Vaglica & Fabrizio Lillo & Rosario N. Mantegna, 2009. "Market impact and trading profile of large trading orders in stock markets," Papers 0908.0202, arXiv.org.
- Malcolm Baker & Jeffrey Wurgler, 2006.
"Investor Sentiment and the Cross-Section of Stock Returns,"
Journal of Finance,
American Finance Association, vol. 61(4), pages 1645-1680, 08.
- Malcolm Baker & Jeffrey Wurgler, 2004. "Investor Sentiment and the Cross-Section of Stock Returns," NBER Working Papers 10449, National Bureau of Economic Research, Inc.
- Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
- F. Ren & Y. -C. Zhang, 2008. "Trading Model with Pair Pattern Strategies," Papers 0801.3560, arXiv.org.
- Vasiliki Plerou & Parameswaran Gopikrishnan & Xavier Gabaix & H. Eugene Stanley, 2001. "Quantifying Stock Price Response to Demand Fluctuations," Papers cond-mat/0106657, arXiv.org.
- Zhou, Wei-Xing & Sornette, Didier, 2004. "Antibubble and prediction of China's stock market and real-estate," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 243-268.
- Zheng, Dafang & Wang, Bing-Hong, 2001. "Statistical properties of the attendance time series in the minority game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 301(1), pages 560-566.
- Ren, F. & Zhang, Y.C., 2008. "Trading model with pair pattern strategies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(22), pages 5523-5534.
- Dhar, Deepak & Sasidevan, V. & Chakrabarti, Bikas K., 2011. "Emergent cooperation amongst competing agents in minority games," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(20), pages 3477-3485.
- Challet, D. & Zhang, Y.-C., 1997. "Emergence of cooperation and organization in an evolutionary game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 246(3), pages 407-418.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1209.3399. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.