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Price dynamics, informational efficiency and wealth distribution in continuous double auction markets

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  • Gil Bazo, Javier
  • Tapia Torres, Miguel Ángel
  • Moreno Muñoz, Jesús David

Abstract

This paper studies the properties of the continuous double auction trading mechanishm using an artificial market populated by heterogeneous computational agents. In particular, we investigate how changes in the population of traders and in market microstructure characteristics affect price dynamics, information dissemination and distribution of wealth across agents. In our computer simulated market only a small fraction of the population observe the risky asset's fundamental value with noise, while the rest of agents try to forecast the asset's price from past transaction data. In contrast to other artificial markets, we assume that the risky asset pays no dividend, so agents cannot learn from past transaction prices and subsequent dividend payments. We find that private information can effectively disseminate in the market unless market regulation prevents informed investors from short selling or borrowing the asset, and these investors do not constitute a critical mass. In such case, not only are markets less efficient informationally, but may even experience crashes and bubbles. Finally, increased informational efficiency has a negative impact on informed agents' trading profits and a positive impact on artificial intelligent agents' profits.

Suggested Citation

  • Gil Bazo, Javier & Tapia Torres, Miguel Ángel & Moreno Muñoz, Jesús David, 2005. "Price dynamics, informational efficiency and wealth distribution in continuous double auction markets," DEE - Working Papers. Business Economics. WB wb057819, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
  • Handle: RePEc:cte:wbrepe:wb057819
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    References listed on IDEAS

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    Cited by:

    1. Chiarella, Carl & Iori, Giulia, 2009. "The impact of heterogeneous trading rules on the limit order book and order flows," Journal of Economic Dynamics and Control, Elsevier, pages 525-537.
    2. Yi-Fang Liu & Wei Zhang & Chao Xu & Jørgen Vitting Andersen & Hai-Chuan Xu, 2014. "Impact of information cost and switching of trading strategies in an artificial stock market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01011701, HAL.
    3. Yi-Fang Liu & Wei Zhang & Chao Xu & Jørgen Vitting Andersen & Hai-Chuan Xu, 2014. "Impact of information cost and switching of trading strategies in an artificial stock market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00983051, HAL.
    4. Lijian Wei & Wei Zhang & Xue-Zhong He & Yongjie Zhang, 2013. "Learning and Information Dissemination in Limit Order Markets," Research Paper Series 333, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Lijian Wei & Wei Zhang & Xiong Xiong & Lei Shi, 2014. "Position-Limit Design for the CSI 300 Futures Markets," Research Paper Series 349, Quantitative Finance Research Centre, University of Technology, Sydney.
    6. Liu, Yi-Fang & Zhang, Wei & Xu, Chao & Vitting Andersen, Jørgen & Xu, Hai-Chuan, 2014. "Impact of information cost and switching of trading strategies in an artificial stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 407(C), pages 204-215.
    7. Yi-Fang Liu & Wei Zhang & Chao Xu & J{o}rgen Vitting Andersen & Hai-Chuan Xu, 2013. "Impact of information cost and switching of trading strategies in an artificial stock market," Papers 1311.4274, arXiv.org, revised Jul 2014.
    8. Yi-Fang Liu & Wei Zhang & Chao Xu & Jørgen Vitting Andersen & Hai-Chuan Xu, 2014. "Impact of information cost and switching of trading strategies in an artificial stock market," Documents de travail du Centre d'Economie de la Sorbonne 14031, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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