IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v373y2007icp665-671.html
   My bibliography  Save this article

Impact of asymmetric information on market evolution

Author

Listed:
  • Wang, Yougui
  • Li, Yong
  • Liu, Mengmeng

Abstract

In this paper, we propose an agent-based model to study the impact of asymmetric information on market evolution. In each period, buyers and sellers are randomly matched. The condition for the transaction being performed depends on the comparison between valuations of buyers and sellers on the good they trade. We introduce cognitive capability to describe buyers’ valuation on a good and valuation ratio to reflect the gap between two kinds of traders’ valuations on the good. The market outcomes are sorted into four phases in the parameter space of these two variables. Computer simulations show us critical phenomena of phase transition. The model proposed herein is able to demonstrate how the asymmetry of information leads to the adverse selection effect. The model also explains the coexistence of low- and high-quality goods in a market with asymmetric information. We analyze the condition under which the asymmetry of information might not take its effect and find that the gap of valuations between buyers and sellers plays the key role.

Suggested Citation

  • Wang, Yougui & Li, Yong & Liu, Mengmeng, 2007. "Impact of asymmetric information on market evolution," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 373(C), pages 665-671.
    • Handle: RePEc:eee:phsmap:v:373:y:2007:i:c:p:665-671
    DOI: 10.1016/j.physa.2006.05.037
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437106006558
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2006.05.037?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Levy, Haim & Levy, Moshe & Solomon, Sorin, 2000. "Microscopic Simulation of Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780124458901.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tao Jia & Robert F Spivey & Boleslaw Szymanski & Gyorgy Korniss, 2015. "An Analysis of the Matching Hypothesis in Networks," PLOS ONE, Public Library of Science, vol. 10(6), pages 1-12, June.
    2. Wang, Yougui & Stanley, H.E., 2009. "Statistical approach to partial equilibrium analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(7), pages 1173-1180.
    3. Tilles, Paulo F.C. & Ferreira, Fernando F. & Francisco, Gerson & Pereira, Carlos de B. & Sarti, Flavia M., 2011. "A Markovian model market—Akerlof’s lemons and the asymmetry of information," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(13), pages 2562-2570.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lovric, M. & Kaymak, U. & Spronk, J., 2008. "A Conceptual Model of Investor Behavior," ERIM Report Series Research in Management ERS-2008-030-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    2. Tanya Araújo & Miguel St. Aubyn, 2008. "Education, Neighborhood Effects And Growth: An Agent-Based Model Approach," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 99-117.
    3. Moshe Levy & Haim Levy, 2013. "Prospect Theory: Much Ado About Nothing?," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 7, pages 129-144, World Scientific Publishing Co. Pte. Ltd..
    4. A. Corcos & J-P Eckmann & A. Malaspinas & Y. Malevergne & D. Sornette, 2002. "Imitation and contrarian behaviour: hyperbolic bubbles, crashes and chaos," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 264-281.
    5. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2001. "Microscopic Models of Financial Markets," Papers cond-mat/0110354, arXiv.org.
    6. Mikhail Anufriev & Giulio Bottazzi, 2005. "Price and Wealth Dynamics in a Speculative Market with an Arbitrary Number of Generic Technical Traders," LEM Papers Series 2005/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    7. Maximilian Beikirch & Torsten Trimborn, 2020. "Novel Insights in the Levy-Levy-Solomon Agent-Based Economic Market Model," Papers 2002.10222, arXiv.org.
    8. Peter Richmond & Sorin Solomon, 2000. "Power Laws are Boltzmann Laws in Disguise," Papers cond-mat/0010222, arXiv.org.
    9. Anufriev, Mikhail & Bottazzi, Giulio & Marsili, Matteo & Pin, Paolo, 2012. "Excess covariance and dynamic instability in a multi-asset model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1142-1161.
    10. Perepelitsa, Misha & Timofeyev, Ilya, 2019. "Asynchronous stochastic price pump," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 516(C), pages 356-364.
    11. Baosheng Yuan & Kan Chen, 2005. "Impact of Investor's Varying Risk Aversion on the Dynamics of Asset Price Fluctuations," Papers physics/0506224, arXiv.org.
    12. Hiroshi Takahashi, 2012. "An Analysis Of The Influence Of Dispersion Of Valuations On Financial Markets Through Agent-Based Modeling," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 143-166.
    13. Sornette, Didier & Zhou, Wei-Xing, 2006. "Importance of positive feedbacks and overconfidence in a self-fulfilling Ising model of financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(2), pages 704-726.
    14. Guo, Xu & McAleer, Michael & Wong, Wing-Keung & Zhu, Lixing, 2017. "A Bayesian approach to excess volatility, short-term underreaction and long-term overreaction during financial crises," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 346-358.
    15. Anca Gheorghiu & Ion Sp^anulescu, 2011. "Macrostate Parameter and Investment Risk Diagrams for 2008 and 2009," Papers 1101.4674, arXiv.org.
    16. Marco Raberto & Silvano Cincotti & Sergio Focardi & Michele Marchesi, 2003. "Traders' Long-Run Wealth in an Artificial Financial Market," Computational Economics, Springer;Society for Computational Economics, vol. 22(2), pages 255-272, October.
    17. Anufriev, Mikhail & Panchenko, Valentyn, 2009. "Asset prices, traders' behavior and market design," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1073-1090, May.
    18. Miklós Antal & Ardjan Gazheli & Jeroen C.J.M. van den Bergh, 2012. "Behavioural Foundations of Sustainability Transitions. WWWforEurope Working Paper No. 3," WIFO Studies, WIFO, number 46424.
    19. Olivier Brandouy & Angelo Corelli & Iryna Veryzhenko & Roger Waldeck, 2012. "A re-examination of the “zero is enough” hypothesis in the emergence of financial stylized facts," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 7(2), pages 223-248, October.
    20. Torsten Trimborn & Philipp Otte & Simon Cramer & Maximilian Beikirch & Emma Pabich & Martin Frank, 2020. "SABCEMM: A Simulator for Agent-Based Computational Economic Market Models," Computational Economics, Springer;Society for Computational Economics, vol. 55(2), pages 707-744, February.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:373:y:2007:i:c:p:665-671. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.