What Is the Impact of Heterogeneous Knowledge About Fundamentals on Market Liquidity and Efficiency: An ABM Approach

Conference paper
Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 676)


This paper studies the effect of investor’s bounded rationality on market dynamics. In an order driven market, we consider a few-types model where two risky assets are traded. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor’s demand is defined by a utility maximization under constant absolute risk aversion. Relaxing the assumption of perfect knowledge of the fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader’s belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model is not showing raising average volatility on long term. Concerning the fundamentalists, the belief perseverance has a stabilization impact on the trading price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.


Agent based model financial market fundamental value bounded rationality. 


  1. Amihud Y (2002) Illiquidity and stock returns: illiquidity and stock returns: cross-section and time-series effects. Journal of Financial Markets 5:31–56CrossRefGoogle Scholar
  2. Amihud Y, Mendelson H, Perdersen LH (2005) Liquidity and asset prices. Found Trends Financ 1(4):269–364CrossRefGoogle Scholar
  3. Bao T, Hommes C, Sonnemans J, Tuinstra J (2012) Individual expectations, limited rationality and aggregate outcomes. J Econ Dyn Control 36: 1101–1120CrossRefGoogle Scholar
  4. Barber BM, Odean T (2000) Trading is hazardous to your wealth: the common stock investment performance of individual investors. The Journal of Finance 55(2):773–806CrossRefGoogle Scholar
  5. Barberis N, Thaler R (2003) A survey of behavioral finance. Handb Econ Financ 1(B):1053–1128Google Scholar
  6. Beja A, Goldman MB (1980) On the dynamic behavior of prices in disequilibrium. J Financ 35(2):235–248CrossRefGoogle Scholar
  7. Chiarella C, Iori G, Perello J (2009) The impact of heterogeneous trading rules on the limit order book and order flows. J Econ Dyn Control 33: 525–537CrossRefGoogle Scholar
  8. Fama EF (1970) Efficient capital markets: a review of theory and empirical work. J Financ 25(2):383–417CrossRefGoogle Scholar
  9. Giardina I, Bouchaud J-P (2003) Bubbles, crashes and intermittency in agent based market models. Eur Phys J B 31:421–437CrossRefGoogle Scholar
  10. Hommes C (2006) Heterogeneous agent models in economics and finance. Handb Comput Econ 2:1109–1186CrossRefGoogle Scholar
  11. Hommes C, Wagener F (2009) Complex evolutionary systems in behavioral finance. In: Hens T, Schenk-Hoppe K (eds) Handbook of financial markets: dynamics and evolution. Elsevier, pp 217–276Google Scholar
  12. Hommes C, Huang H, Wang D (2005) A robust rational route to randomness in a simple asset pricing model. J Econ Dyn Control 29:1043–1072CrossRefGoogle Scholar
  13. Hommes C, Boswijk P, Manzan S (2007) Behavioral heterogneity in stock prices. J Econ Dyn Control 31:1938–1970CrossRefGoogle Scholar
  14. Lord C, Ross L, Lepper M (1979) Biased assimilation and attitude polarization: the effects of prior theories on subsequently considered evidence. Journal of Personality and Social Psychology 37:2098–2109CrossRefGoogle Scholar
  15. Lux T, Marchesi M (2000) Volatility clustering in financial markets: a micro-simulation of interactive agents. International Journal of Theoretical and Applied Finance 3:675–702CrossRefGoogle Scholar
  16. Parlour CA (1998) Price dynamics in limit order markets. Rev Financ Stud 11(4):789–816CrossRefGoogle Scholar
  17. Shiller RJ (2003) From efficient markets theory to behavioral finance. The Journal of Economic Perspectives 17(1):83–104CrossRefGoogle Scholar
  18. Tversky A, Kahneman D (1974) Judgment under uncertainty: heuritics and biases. Science 185(4157):1124–1131CrossRefGoogle Scholar
  19. Westerhoff FH (2004) Multi-asset market dynamics. Macroecon Dyn 8: 596–616Google Scholar
  20. Yamamoto R (2011) Order aggressiveness, pre-trade transparency, and long memory in an order-driven market. J Econ Dyn Control 35:1938–1963CrossRefGoogle Scholar

Copyright information

© Springer International Publishing Switzerland 2015

Authors and Affiliations

  1. 1.Aix-Marseille School of EconomicsAix-Marseille University, CNRS & EHESSMarseilleFrance

Personalised recommendations