Abstract
AbstractThis agent-based financial market model is a generalization of the model of Westerhoff (The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies) by traders who are allowed to have different investment horizons as introduced by Demary (Who Does a Currency Transaction Tax Harm More: Short-Term Speculators or Long-Term Investors?). Our research goals are, first, to study what consequences the introduction of heterogeneous investment horizons has for agent-based financial market models, and second, how effective transaction taxes are in stabilizing financial markets. Numerical simulations reveal that under sufficiently small tax rates traders abstain from short-term trading in favour of longer investment horizons. This change in behavior leads to less volatility and less mispricings. When the tax rate exceeds a certain threshold, however, mispricings increase as also found in Westerhoff (Heterogeneous Traders and the Tobin Tax and The Use of Agent-Based Financial Market Models to Test the Effectiveness of Regulatory Policies). This emergent property is due to the fact that taxation reduces short-term fluctuations and causes longer lasting trends in the exchange rate. As a result, the longer term fundamentalist trading rule becomes unpopular in favor of the longer term trend-chasing rule.
Highlights
Asset prices are excessively volatile due to speculative bubbles and crashes
Properties that emerge from agent-based financial market models are typically volatility clustering and the fat-tailness of the distribution of returns, which can be found in empirical daily return time series. [Lux, T. (2009b)] points out that agent-based models could provide the missing link between the literature on behavioral biases and the econometrics literature, which focusses on stylized facts of financial market data
The economic policy analysis leads to the following results
Summary
Asset prices are excessively volatile due to speculative bubbles and crashes. The first reported historical example of an asset price bubble is the Tulipmania in 1636-37 ([Garber, P. (1990)]). [Thomson, E. (2007)] reports that the price of a tulip on 3rd February 1637 was approximatetly the same as the price of a full furnitured luxury house in the city center of Amsterdam. Traditional economic theory predicts speculative bubbles to be arbitraged away by rational agents who will trade against mispricings These rational agents will crowd out irrational traders, who rely on trends and market psychology. (1978)] proposed to introduce taxes on financial markets in order to reduce speculative trading Both assume that short term traders have a destabilizing impact on prices, while long term traders’ trading behavior is stabilizing. Emergent properties in agent-based financial market models that arise from the interaction of heterogeneous groups of traders are bubbles and crashes, excess volatility, volatility clustering and. Our first objective is to study the implications of longer term investment horizons for exchange rate dynamics in agentbased models, the second one is to use this artificial laboratory for analyzing the effectiveness of currency transaction taxes.
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