Trading Behavior and Excess Volatility in Toy Markets

SISSA Working Paper No. CM/188/00

14 Pages Posted: 15 Sep 2000

See all articles by Matteo Marsili

Matteo Marsili

Abdus Salam International Centre Theoretical Physics (ICTP)

Damien Challet

CentraleSupélec; Encelade Capital SA

Date Written: May 2000

Abstract

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

Marsili, Matteo and Challet, Damien, Trading Behavior and Excess Volatility in Toy Markets (May 2000). SISSA Working Paper No. CM/188/00. Available at SSRN: https://ssrn.com/abstract=237128 or http://dx.doi.org/10.2139/ssrn.237128

Matteo Marsili (Contact Author)

Abdus Salam International Centre Theoretical Physics (ICTP)

Strada Costiera 11
34100 Trieste
Italy

Damien Challet

CentraleSupélec ( email )

Labo MICS
3, rue Joliot-Curie
Gif-sur-Yvette, 91192
France

Encelade Capital SA ( email )

Chemin du Bochet 8
Sulpice, 1025
Switzerland

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