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Market Ecology: Trading Strategies and Market Volatility

Author

Listed:
  • Kun Xing

    (Beijing Normal University
    Beijing Normal University)

  • Honggang Li

    (Beijing Normal University
    Beijing Normal University)

Abstract

The value strategy and technical analysis strategy have existed in the financial market for a long time, and the impact of these two types of strategies on the financial market has also been debated for a long time. This paper studies the impact of trading strategies on market volatility by constructing a market ecology model including the simple technical strategy and value strategy. The results show that both the nature and the population size of a trading strategy can affect market volatility. In a market composed of the trend-following strategy and the value strategy, when the populations of the two strategies match, market volatility is low; when either of the two strategies has too much population, market volatility is high. However, in a market composed of the trend-reversal strategy and the value strategy, there is a positive correlation between market volatility and the population size of each strategy. The comparison of these results suggests that substantial diversification of trading strategies may be a fundamental force for market stability.

Suggested Citation

  • Kun Xing & Honggang Li, 2024. "Market Ecology: Trading Strategies and Market Volatility," Computational Economics, Springer;Society for Computational Economics, vol. 64(6), pages 3333-3351, December.
    • Handle: RePEc:kap:compec:v:64:y:2024:i:6:d:10.1007_s10614-024-10562-z
    DOI: 10.1007/s10614-024-10562-z
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