Abstract
We implement an agent-based simulation of financial market model. Agent-based simulations are used nowadays as an alternative to the traditional models, based on predetermined equilibrium state theory. Agent technology brings some kind of local intelligence and rational expectations to the decision support system of financial market participants. Agents follow technical and fundamental trading rules to determine their speculative investment positions. We consider direct interactions between speculators and they may decide to change their trading behaviour. If a technical trader meets a fundamental trader and they realize that fundamental trading has been more profitable than technical trading in recent past, the probability that the technical trader switches to the fundamental trading rules is relatively high. In particular the influence of transaction costs is studied in this paper. Transaction costs can be increased by the off-market regulation (for example in the form of taxes) on financial market stability, by overall volume of trade and other market characteristics. The paper shows a positive impact of suitable transaction costs on the financial market stability in the long run.
Highlights
Simulation of financial market (Macal, North 2006) is a new fast growing research area with two primary motivations
Transaction costs influence on the stability of financial market: agent-based simulation or to invest the money according to the development of the inflation rate, his or her expectations about the future, and experiences obtained in the past
The agent-based simulation of the financial model implemented in this paper has the tendency to stabilize itself in a long term, if the fundamental trading rules are overbearing the technical trading method
Summary
Simulation of financial market (Macal, North 2006) is a new fast growing research area with two primary motivations. Transaction costs influence on the stability of financial market: agent-based simulation. This paper firstly defines how financial market participants may select their trading rules, secondly describes a multi-agent model of the transaction costs influence on the stability of financial market. We used and extended the original model developed by Frank Westerhoff (Westerhoff 2009) in our research This model recombines a number of building blocks from three known multi-agent models of financial market. The probability that technical traders (either being optimistic or pessimistic) switch to fundamental trading (and vice versa) depends on the relative profitability of the rules. The attractiveness of a rule is approximated by a weighted average of current and past profits We extended this model with transaction costs influence.
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