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PRICE DYNAMICS, INFORMATIONAL EFFICIENCY, AND WEALTH DISTRIBUTION IN CONTINUOUS DOUBLE‐AUCTION MARKETS
Author(s) -
GilBazo Javier,
Moreno David,
Tapia Mikel
Publication year - 2007
Publication title -
computational intelligence
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.353
H-Index - 52
eISSN - 1467-8640
pISSN - 0824-7935
DOI - 10.1111/j.1467-8640.2007.00301.x
Subject(s) - double auction , asset (computer security) , dividend , market microstructure , population , economics , database transaction , microeconomics , financial economics , business , finance , common value auction , order (exchange) , computer science , demography , computer security , sociology , programming language
This paper studies the properties of the continuous double‐auction trading mechanism using an artificial market populated by heterogeneous computational agents. In particular, we investigate how changes in the population of traders and in market microstructure characteristics affect price dynamics, information dissemination, and distribution of wealth across agents. In our computer‐simulated market only a small fraction of the population observe the risky asset's fundamental value with noise, while the rest of the agents try to forecast the asset's price from past transaction data. In contrast to other artificial markets, we assume that the risky asset pays no dividend, thus agents cannot learn from past transaction prices and subsequent dividend payments. We find that private information can effectively disseminate in the market unless market regulation prevents informed investors from short selling or borrowing the asset, and these investors do not constitute a critical mass. In such case, not only are markets less efficient informationally, but may even experience crashes and bubbles. Finally, increased informational efficiency has a negative impact on informed agents' trading profits and a positive impact on artificial intelligent agents' profits.