How Does Learning Affect Market Liquidity? A Simulation Analysis of a Double-Auction Financial Market with Portfolio Traders.

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Abstract

We study the relationship between liquidity and prices in an artificial financial market whereportfolio traders with limited resources interact through a continuous, electronic open book.We depart from the standard asset pricing framework in two ways. First, we assume thatinvestors have incomplete information about the distribution of returns. Second, we model theportfolio choice problem using prospect-type preferences. We model the utility function interms of deviations of the portfolio growth rate from a specified target growth rate, and weassume that investors are more sensitive to downside movements. We show that theparameters defining the learning process affect the price dynamics through their impact on thevariability of the market liquidity.
Lingua originaleEnglish
pagine (da-a)1910-1937
Numero di pagine28
RivistaJOURNAL OF ECONOMIC DYNAMICS & CONTROL
Volume31
Stato di pubblicazionePublished - 2007

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

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