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Fundamental traders' ‘tragedy of the commons’: Information costs and other determinants for the survival of experts and noise traders in financial markets

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  • Witte, Björn-Christopher

Abstract

This study explores the long-standing question about the survival of noise traders in financial markets through the relatively new method of agent-based modeling. We find that, in the normal case, there are two attractors for the ratio of experts versus noise traders. Either experts disappear almost entirely from the market, or they account for a certain fraction, with noise traders still being present. In the dynamic framework, the dynamics switches between these attractors, which leads to the emergence of some typical statistical features of financial markets, such as long memory, leptokurtic returns, and bubbles and crashes. Furthermore, we achieve a general approximation of the attractors and of the switching point in between from relevant determinants.

Suggested Citation

  • Witte, Björn-Christopher, 2013. "Fundamental traders' ‘tragedy of the commons’: Information costs and other determinants for the survival of experts and noise traders in financial markets," Economic Modelling, Elsevier, vol. 32(C), pages 377-385.
    • Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:377-385
    DOI: 10.1016/j.econmod.2013.02.030
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    2. Hai-Chuan Xu & Wei Zhang & Xiong Xiong & Wei-Xing Zhou, 2014. "Wealth Share Analysis with “Fundamentalist/Chartist” Heterogeneous Agents," Abstract and Applied Analysis, Hindawi, vol. 2014, pages 1-11, May.

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    More about this item

    Keywords

    Information costs; Noise trader; Fundamental analysis; Agent-based modeling;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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