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Trading Volume and Market Efficiency: An Agent Based Model with Heterogenous Knowledge about Fundamentals

  • Vivien Lespagnol

    ()

    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))

  • Juliette Rouchier

    ()

    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - École des Hautes Études en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))

This paper studies the effect of investor's bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are exchanged. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor's demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader's belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the unknown fundamental has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.

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Paper provided by HAL in its series Working Papers with number halshs-00997573.

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Date of creation: May 2014
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Handle: RePEc:hal:wpaper:halshs-00997573
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00997573
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