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Impact of information cost and switching of trading strategies in an artificial stock market

Listed author(s):
  • Yi-Fang Liu

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Wei Zhang

    (MI - College of Management and Economics - Tianjin University - China Center for Social Computing and Analytics - Tianjin University)

  • Chao Xu

    ()

    (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University)

  • Jørgen Vitting Andersen

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Hai-Chuan Xu

    (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - Tianjin University)

Registered author(s):

    This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers.

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    Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-01011701.

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    Date of creation: Aug 2014
    Publication status: Published in Physica A: Statistical Mechanics and its Applications, Elsevier, 2014, 407, pp.204-215. <10.1016/j.physa.2014.04.004>
    Handle: RePEc:hal:cesptp:hal-01011701
    DOI: 10.1016/j.physa.2014.04.004
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01011701
    Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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