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What Is the Impact of Heterogeneous Knowledge About Fundamentals on Market Liquidity and Efficiency: An ABM Approach

In: Advances in Artificial Economics

Author

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  • Vivien Lespagnol

    (Aix-Marseille University, CNRS & EHESS)

  • Juliette Rouchier

    (Aix-Marseille University, CNRS & EHESS)

Abstract

This paper studies the effect of investor’s bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are traded. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor’s demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader’s belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the belief perseverance has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.

Suggested Citation

  • Vivien Lespagnol & Juliette Rouchier, 2015. "What Is the Impact of Heterogeneous Knowledge About Fundamentals on Market Liquidity and Efficiency: An ABM Approach," Lecture Notes in Economics and Mathematical Systems, in: Frédéric Amblard & Francisco J. Miguel & Adrien Blanchet & Benoit Gaudou (ed.), Advances in Artificial Economics, edition 127, pages 105-117, Springer.
    • Handle: RePEc:spr:lnechp:978-3-319-09578-3_9
    DOI: 10.1007/978-3-319-09578-3_9
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    References listed on IDEAS

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