Margins and Transaction Taxes in an Artificial Speculative Futures Market
This paper creates an artificial stock market, from a minimalist heterogeneous agent model of futures speculation on a non-storable commodity, with real time gross settlement. All agents have risk neutral preferences and stochastic adaptive expectations according to different trader types â€“ fundamentalist, chartist, or noise trader. Market clearing is consolidated through a Walrasian auctioneer, similar to a call auction mechanism. Price volatility and trader wealth are explored for different margin requirements and transaction taxes. It appears that margins and transaction costs help procreate large traders who adopt the behavior of â€œmarket makersâ€ imposing a spread on their buying and selling. The dominance of the market by a few large traders both reduces local price variation about the mean but increases extreme price movements, and hence overall kurtosis of returns. These large traders influence prices and can promote the prevalence of multiple equilibria in the market, which adds to price volatility and compromises market efficiency. The possibility for multiple equilibria is due to the margin account which is valued in the speculative futures market simultaneously with trader positions due to real time gross settlement. This creates a positive feedback between agent wealth and prices. Walrasian clearing limits such destabilizing trades that may arise from margin calls in times of market stress. But this kind of volatility increases when market speculator expectations are not uniform and/or individual traders become large relative to the market. In this simple stochastic price model, where all traders have minimal intelligence, lucky traders can grow into large traders and persist for a medium length of time, beyond what their knowledge deserves. Trader wealth distributions become skewed and usually have power law tails. This tendency for large traders to emerge appears to exist regardless of market size. Cumulative tendencies, due to the leverage opportunities from margins and existence of transaction costs on trading, appear to reduce the competitiveness of the market. The setting of the margin requirement by an exchange is shown to affect the prevalence of large traders. Large traders and extreme price movements appear to be less in either a very low or very high leveraged market. Furthermore, transaction taxes increase local variation of price movements, although they may reduce larger price movements in low levered markets. This artificially generated market provisionally identifies some potentially tractable optimal exchange policy, supportive of more stable and competitive trading rules
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