Heterogeneous wealth distribution, round-trip trading and the emergence of volatility clustering in Speculation Game

TL;DR

This paper analyzes a minimal agent-based financial market model showing that heterogeneous wealth distribution and round-trip trading can lead to volatility clustering, supported by empirical data.

Contribution

It demonstrates that wealth heterogeneity and round-trip trading induce volatility clustering without herding behavior, revealing a new mechanism in market dynamics.

Findings

Wealth redistribution through round-trip trades widens wealth disparity.

Large price fluctuations are caused by big orders from wealthy traders.

Empirical data supports the model's scenario.

Abstract

This study is a detailed analysis of Speculation Game, a minimal agent-based model of financial markets, in which the round-trip trading and the dynamic wealth evolution with variable trading volumes are implemented. Instead of herding behavior, we find that the emergence of volatility clustering can be induced by the heterogeneous wealth distribution among traders. In particular, the spontaneous redistribution of market wealth through repetitions of round-trip trades can widen the wealth disparity and establish the Pareto distribution of the capital size. In the meantime, large fluctuations in price return are brought on by the intermittent placements of the relatively big orders from rich traders. Empirical data are used to support the scenario derived from the model.