Trendsetters and Price Oscillations in a Wealth Game Model

Summary

This paper analyzes price behavior in a simplified agent-based market called the Wealth Game. It removes market makers, which forces majority traders to limit their stock trades to keep aggregate supply and demand balanced. The remaining strategies represent optimistic and pessimistic fundamentalists alongside trend-followers, making it possible to study how these trader types interact in a reduced setting.

The authors identify a dynamical phase transition between a trendsetters’ regime and a bouncing, oscillatory regime. They examine how price sensitivity and market impact shape the transition, using a semi-empirical analysis to explain the mechanism and locate the phase boundary. They also find a transition as the share of trend-following strategies rises, which they explain through a macro-level supply and demand balance. These results are about the behavior of a stylized model; the description gives no empirical validation against real markets or quantitative details about the boundary, so it does not establish when comparable regimes occur in traded assets.

Key ideas

• The model studies interactions between trend-followers and optimistic or pessimistic fundamentalists.
• Removing market makers leads majority traders to restrict trades to maintain supply and demand balance.
• Price sensitivity and market impact influence transitions between trending and bouncing regimes.
• The authors use semi-empirical analysis to explain and locate the phase boundary.
• Increasing the share of trend-following strategies also produces a transition in the simplified market.

Tags

# Price Trends in a Simplified Model of the Wealth Game


# Price Trends in a Simplified Model of the Wealth Game









We consider a simplified version of the Wealth Game, which is an agent-based financial market model with many interesting features resembling the real stock market. Market makers are not present in the game so that the majority traders are forced to reduce the amount of stocks they trade, in order to have a balance in the supply and demand. The strategy space is also simplified so that the market is only left with strategies resembling the decisions of optimistic or pessimistic fundamentalists and trend-followers in the real stock market. A dynamical phase transition between a trendsetters' phase and a bouncing phase is discovered in the space of price sensitivity and market impact. Analysis based on a semi-empirical approach explains the phase transition and locates the phase boundary. A phase transition is also observed when the fraction of trend-following strategies increases, which can be explained macroscopically by matching the supply and demand of stocks.

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