The value of information in a multi-agent market model

Abstract

We present an experimental and simulated model of a multi-agent stock market driven by a double auction order matching mechanism. Studying the effect of cumulative information on the performance of traders, we find a non monotonic relationship of net returns of traders as a function of information levels, both in the experiments and in the simulations. Particularly, averagely informed traders perform worse than the non informed and only traders with high levels of information (insiders) are able to beat the market. The simulations and the experiments reproduce many stylized facts of tick-by-tick stock-exchange data, such as fast decay of autocorrelation of returns, volatility clustering and fat-tailed distribution of returns. These results have an important message for everyday life. They can give a possible explanation why, on average, professional fund managers perform worse than the market index. PACS. 89.65.Gh Economics; econophysics, financial markets, business and management -89.65.-s Social and economic systems -89.70.+c Information theory and communication theory -89.75.-k Complex systems 1 Introduction "We live in an information society" is a commonly used phrase today. Education, knowledge and information are

Partial knowledge is a dangerous thing – On the value of asymmetric fundamental information in asset markets

“…One could assume that they are neither uninformed traders nor insiders, but their exact level of information is very difficult to assess empirically. Thus, Toth, Scalas, Huber, and Kirchler (2007) tackle the question on the value of fundamental information with both agent-based simulations and experiments. Here, one major advantage is that the information level can be controlled and abnormal returns can be measured accordingly.…”

“…In their experiments this pattern vanishes and almost indistinguishable returns between worst informed and average informed traders emerge while insiders still outperform the other traders. Toth et al (2008) improve the simulations of Toth et al (2007) by allowing agents to switch between strategies (fundamentalist and chartist strategy). By applying a Markov-chain algorithm they report that only insider and well-informed agents apply a fundamental strategy in equilibrium.…”

“…Unfortunately, they do not report the returns of the traders in equilibrium. Huber (2007) and Huber, Kirchler, and Sutter (2008) extend the experimental studies of Toth et al (2007) by adding more sophisticated treatments with different market models. In analogy to the empirical evidence they report that insiders outperform the market significantly.…”

Considering value of information when using CFD in design

“…show that the return does not grow monotonically with increasing amounts of information [7]. Thus, there must be some point at which the return no longer exceeds the cost of collecting more information.…”

“…In supply-chain management, value-of-information analysis has been used to generate revenue by reducing information-gathering costs and redirecting inventory flow [7]. In this case, a framework is introduced to determine the impact of marginal information on the cost performance of a supplier.…”