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Herding effects in order driven markets: The rise and fall of gurus

Tedeschi, G., Iori, G. and Gallegati, M. (2012). Herding effects in order driven markets: The rise and fall of gurus. Journal of Economic Behavior and Organization, 81(1), pp. 82-96. doi: 10.1016/j.jebo.2011.09.006

Abstract

We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure evolves endogenously via a fitness mechanism based on agents performance. We assess under which assumptions imitation, among noise traders, can give rise to the emergence of gurus and their rise and fall in popularity over time. We study the wealth distribution of gurus, followers and non followers and show that traders have an incentive to imitate and a desire to be imitated since herding turns out to be profitable. The model is then used to study the effect that different competitive strategies (i.e. chartist & fundamentalist) have on agents performance. Our findings show that positive intelligence agents cannot invade a market populated by noise traders when herding is high.

Publication Type: Article
Additional Information: © 2012, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Dynamic network; Herding; Guru; Order driver market
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/12363
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