Effects of diversification among assets in an agent-based market model

TL;DR

This paper extends a single-asset market model to include multiple assets, examining how diversification by adaptive agents influences market complexity and stability, with implications for financial decision making.

Contribution

It introduces a multi-asset extension to an existing agent-based market model, analyzing diversification effects on market dynamics and stability.

Findings

Diversification increases market complexity.

Diversification can destabilize financial markets.

Study highlights importance for financial decision making.

Abstract

We extend to the multi-asset case the framework of a discrete time model of a single asset financial market developed in Ghoulmie et al (2005). In particular, we focus on adaptive agents with threshold behavior allocating their resources among two assets. We explore numerically the effect of this diversification as an additional source of complexity in the financial market and we discuss its destabilizing role. We also point out the relevance of these studies for financial decision making.