Price Trends in a Simplified Model of the Wealth Game

TL;DR

This paper analyzes a simplified agent-based financial market model resembling real stock markets, revealing a phase transition between different market behaviors driven by strategy composition and market impact.

Contribution

It introduces a simplified Wealth Game model without market makers, identifying a phase transition between trend-following and bouncing phases based on key parameters.

Findings

Identifies a dynamical phase transition influenced by price sensitivity and market impact.

Locates the phase boundary using a semi-empirical analysis.

Shows a phase transition related to the fraction of trend-following strategies.

Abstract

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.