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

  • Yi-Fang Liu

    (College of Management and Economics, China Center for Social Computing and Analytics and Centre d'Economie de la Sorbonne)

  • Wei Zhang

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

  • Chao Xu

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

  • Jørgen Vitting Andersen

    ()

    (Centre d'Economie de la Sorbonne)

  • Hai-Chuan Xu

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

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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    File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2014/14031.pdf
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    Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 14031.

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    Length: 16 pages
    Date of creation: Apr 2014
    Date of revision:
    Handle: RePEc:mse:cesdoc:14031
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