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By incorporating market impact and momentum traders into an agent-basedmodel, we investigate the conditions for the occurrence of self-reinforcingfeedback loops and the coevolutionary mechanism of prices and strategies. Forlow market impact, the price fluctuations are originally large. The existenceof momentum traders has little impact on the change of price fluctuations butdestroys the equilibrium between the trend-following and trend-rejectingstrategies. The trend-following herd behaviors become dominant. Aself-reinforcing feedback loop exists. For high market impact, the existence ofmomentum traders leads to an increase in price fluctuations. Thetrend-following strategies of rational individuals are suppressed while thetrend-following strategies of momentum traders are promoted. Thecrowd-anticrowd behaviors become dominant. A negative feedback loop exists. Atheoretical analysis indicates that, for low market impact, the majority effectis beneficial for the trend-followers to earn more, which in turn promotes thetrend-following strategies. For high market impact, the minority effect causesthe trend-followers to suffer great losses, which in turn suppresses thetrend-following strategies.

Self-reinforcing feedback loop in financial markets with coupling of market impact and momentum traders