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How Trend Followers Affect Efficiency and Volatility in a Mixed Trading Game

Article arXiv papers · Author: A. De Martino et al.
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Summary

This paper studies a market game with two kinds of adaptive traders: fundamentalists, who act to differentiate themselves from the crowd, and trend followers, who imitate others. It examines how the proportion of each type changes the market’s information efficiency and aggregate fluctuations.

The authors analyze the model using both an approximate static replica method and a dynamical generating-functional method. Their results indicate that an unpredictable, efficient phase is possible only when trend followers make up less than half of the population; above that threshold, global fluctuations rise sharply. The two theoretical approaches are reported to agree with each other and with numerical simulations. The findings concern this stylized game with random external information, so they do not establish that real markets have the same threshold or behavior.

Key ideas

  • The model represents fundamentalists and trend followers as competing adaptive trader types.
  • Increasing the trend-follower share reduces informational efficiency in the model.
  • An efficient, unpredictable phase occurs only below a trend-follower share of one half.
  • When trend followers exceed half the population, aggregate fluctuations grow sharply.
  • Replica theory, generating-functional analysis, and numerical results are reported to align.

Tags

StatisticsMarket microstructureVolatility
Full text
# Statistical mechanics of the mixed majority-minority game with random external information


# Statistical mechanics of the mixed majority-minority game with random external information









We study the asymptotic macroscopic properties of the mixed majority-minority game, modeling a population in which two types of heterogeneous adaptive agents, namely ``fundamentalists'' driven by differentiation and ``trend-followers'' driven by imitation, interact. The presence of a fraction f of trend-followers is shown to induce (a) a significant loss of informational efficiency with respect to a pure minority game (in particular, an efficient, unpredictable phase exists only for f<1/2), and (b) a catastrophic increase of global fluctuations for f>1/2. We solve the model by means of an approximate static (replica) theory and by a direct dynamical (generating functional) technique. The two approaches coincide and match numerical results convincingly.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.