How Price Limits Effect the Behaviors of a Market with Differences on Speed of Information Acquisition: An Approach with Artificial Market(An Agent-based Model for Financial Market)

Abstract

To enhance the stability of the financial markets, price limits have been implemented in numerous financial markets. The effects to markets’ stability and traders’ profitability of price limits have been discussed by previous research. But it has not been discussed when there is difference between traders on speed of information acquisition. The asymmetry of information acquisition between traders can be observed in many situations, e.g., overseas investors and domestic investors, insiders and outsiders. Because methods, languages, etc. they use to get information are different, they obtain information about the fundamental values of financial commodities with different speeds. We used a double-auction artificial market to simulate when difference on speed of information acquisition exists, how price limits effect the stability of the financial market, and the profitability of traders who has different speeds to obtain the information about fundamental value. We found if there is difference of speed for getting information between traders, price limits do not always enhance the stability of market. When the band of price limits is loose, the volatility of market price will rise if the ratio of traders with fast speed of information acquisition is relatively large. And when the band of price limits is loose, some traders who has slower speed of information acquisition may be hurt by price limits. Our work shows it is necessary to consider the difference on speed of information acquisition when designing some market institutions like price limits.