Interacting heterogeneous algo-traders : an extension of the Day and Huang model
Abstract
We develop a model with heterogeneous and socially interacting investors applying
different technical trading rules (algorithms), by extending the seminal model of
Day and Huang (1990). The original model consists of (sophisticated) -investors,
(unsophisticated) -investors and a market maker. We have studied the nonlinearity
features and described the dynamic behavior of the market. In the extended
model, -investors are replaced by heterogeneous and socially integrated
algo-traders. Through the communication process, each investor is able to obtain
information about certain other investors and his characteristics (wealth, stress indicator
and trading rule). If he finds a superior investor, he will adapt his or hers
algorithm. Based on ten dissimilar technical trading rules we constructed some numerical
experiments, and simulated the model. Then we evaluated the mean wealth
and the long run price behavior. The combination of algo-traders and the sophisticated
investors resulted in price fluctuates of different types. The volatility was
typically highest at the beginning of the different price series, and in one of the
series a stable 10-cycle appeared. This cycle seems consistent for some levels of the
flocking coefficient in the bifurcation diagram that was generated for the original
Day and Huang model. The main conclusion is that unsophisticated investors does
not destabilize the market. Our extended model provides several starting points for
future work.
Description
Masteroppgave i økonomi og administrasjon - Universitetet i Agder 2013