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Impact of information cost and switching of trading strategies in an artificial stock market

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  • Yi-Fang Liu

    (China Center for Social Computing and Analytics - TJU - Tianjin University, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, College of Management and Economics - Tianjin University)

  • Wei Zhang

    (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University)

  • Chao Xu

    (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University)

  • Jørgen Vitting Andersen

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

  • Hai-Chuan Xu

    (College of Management and Economics - Tianjin University, China Center for Social Computing and Analytics - TJU - Tianjin University)

Abstract

This paper studies the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. First we verify that our model is able to reproduce some of the stylized facts in real financial markets. Next we consider the relationship between switching and the market volatility under different structures of investors. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers.

Suggested Citation

  • Yi-Fang Liu & Wei Zhang & Chao Xu & Jørgen Vitting Andersen & Hai-Chuan Xu, 2014. "Impact of information cost and switching of trading strategies in an artificial stock market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01215947, HAL.
    • Handle: RePEc:hal:cesptp:halshs-01215947
    DOI: 10.1016/j.physa.2014.04.004
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01215947
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    3. Roberto Mota Navarro & Hernán Larralde, 2017. "A detailed heterogeneous agent model for a single asset financial market with trading via an order book," PLOS ONE, Public Library of Science, vol. 12(2), pages 1-27, February.
    4. Kyubin Yim & Gabjin Oh & Seunghwan Kim, 2016. "Understanding Financial Market States Using an Artificial Double Auction Market," PLOS ONE, Public Library of Science, vol. 11(3), pages 1-15, March.

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    Keywords

    Agent-based model; Heterogeneity; Switching behavior; Market volatility;
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