An Agent Based Model for a Double Auction with Convex Incentives

We studied the influence of convex incentives, e.g. option-like compensations, on the behavior of financial markets. Such incentives, usually offered to portfolio managers, have been often considered a potential source of market instability. We built an agent-based model of a double-auction market w...

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Bibliographic Details
Published inJournal of artificial societies and social simulation Vol. 20; no. 1; p. 7
Main Authors Fabretti, Annalisa, Herzel, Stefano
Format Journal Article
LanguageEnglish
Published Guildford Department of Sociology, University of Surrey 01.01.2017
Subjects
Auctions
Contracts
Financial incentives
Incentives
Markets
Prices
Stability
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Summary:We studied the influence of convex incentives, e.g. option-like compensations, on the behavior of financial markets. Such incentives, usually offered to portfolio managers, have been often considered a potential source of market instability. We built an agent-based model of a double-auction market where some of the agents are endowed with convex contracts. We show that these contracts encourage traders to buy more aggressively, increasing total demand and market prices. Our analysis suggests that financial markets with many managers with convex contracts are more likely to be more unstable and less efficient.
ISSN:1460-7425
1460-7425
DOI:10.18564/jasss.3246