Transitions in the Stock Markets of the US, UK, and Germany

TL;DR

This paper analyzes shifts in stock market behavior across the US, UK, and Germany, highlighting sector-based risk changes around 2006 and proposing an agent-based model to explain these transitions, possibly linked to high-frequency trading growth.

Contribution

It introduces an agent-based model that reproduces sector-based risk transition in stock markets and links it to the rise of high-frequency trading around 2006.

Findings

Risky trades shifted from IT to financial sector after 2006

Agent-based model successfully replicates observed market transitions

High-frequency trading increase may have triggered the transition

Abstract

In an analysis of the US, the UK, and the German stock market we find a change in the behavior based on the stock's beta values. Before 2006 risky trades were concentrated on stocks in the IT and technology sector. Afterwards risky trading takes place for stocks from the financial sector. We show that an agent-based model can reproduce these changes. We further show that the initial impulse for the transition might stem from the increase of high frequency trading at that time.