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Buying on margin, selling short in an agent-based market model

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  • Zhang, Ting
  • Li, Honggang

Abstract

Credit trading, or leverage trading, which includes buying on margin and selling short, plays an important role in financial markets, where agents tend to increase their leverages for increased profits. This paper presents an agent-based asset market model to study the effect of the permissive leverage level on traders’ wealth and overall market indicators. In this model, heterogeneous agents can assume fundamental value-converging expectations or trend-persistence expectations, and their effective demands of assets depend both on demand willingness and wealth constraints, where leverage can relieve the wealth constraints to some extent. The asset market price is determined by a market maker, who watches the market excess demand, and is influenced by noise factors. By simulations, we examine market results for different leverage ratios. At the individual level, we focus on how the leverage ratio influences agents’ wealth accumulation. At the market level, we focus on how the leverage ratio influences changes in the asset price, volatility, and trading volume. Qualitatively, our model provides some meaningful results supported by empirical facts. More importantly, we find a continuous phase transition as we increase the leverage threshold, which may provide a further prospective of credit trading.

Suggested Citation

  • Zhang, Ting & Li, Honggang, 2013. "Buying on margin, selling short in an agent-based market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4075-4082.
    • Handle: RePEc:eee:phsmap:v:392:y:2013:i:18:p:4075-4082
    DOI: 10.1016/j.physa.2013.04.052
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    Cited by:

    1. Dong, Xinyue & Ma, Rong & Li, Honggang, 2019. "Stock index pegging and extreme markets," International Review of Financial Analysis, Elsevier, vol. 64(C), pages 13-21.
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    3. Gao, Yan & Gao, Yao, 2015. "Statistical properties of short-selling and margin-trading activities and their impacts on returns in the Chinese stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 438(C), pages 293-307.
    4. Xuan Zhou & Honggang Li, 2019. "Buying on Margin and Short Selling in an Artificial Double Auction Market," Computational Economics, Springer;Society for Computational Economics, vol. 54(4), pages 1473-1489, December.

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