Trading Behavior and Excess Volatility in Toy Markets
SISSA Working Paper No. CM/188/00
14 Pages Posted: 15 Sep 2000
Date Written: May 2000
We study the relation between the trading behavior of agents and volatility in toy markets of adaptive inductively rational agents. We show that excess volatility, in such simplified markets, arises as a consequence of i)the neglect of market impact implicit in price taking behavior and of ii) excessive reactivity of agents. These issues are dealt with in detail in the simple case without public information. We also derive, for the general case, the critical learning rate above which trading behavior leads to turbulent dynamics of the market.
Keywords: Adaptive Learning, El Farol Bar Problem, Minority Games, Market Impact, Adaptive Learning
JEL Classification: G1,D0
Suggested Citation: Suggested Citation