Research On Market Microstructure Based On Bounded Rationality

The author finds current research mainly focuses on the study of the trading mechanism with market maker and full rational traders, based on the survey of the market microstructure theory. Although rational expectation model can analyze the trading strategies of investors with different information, the existence of rational expectation equilibrium requires very strong hypothesis. In addition, though the trading mechanism of Chinese Security Market has no market maker, the theoretic and empirical studies of that mechanism have not made a break through. This dissertation mainly study some important issues of market microstructure based on bounded rationality.Firstly, we study how the bounded rational trading behaviors, such as the limited memory, overconfidence, and incomplete information affect the short price behavior of financial asset. The results indicate that when a greater proportion of bounded rational traders exist in the market, the short-term price behavior of financial asset is significantly different from that when all the investors are full rational. Both the trading activity of limited memory and overconfidence may cause the overreaction phenomenon of the assets short-term price. The empirical result indicates some individual stock of our security market exist the short-term overreaction phenomenon.Secondly, we study the herd behavior in security market, including the reasons why the herd behavior produces in security market from the viewpoint of risk aversion, inventory, the multidimensional uncertainty, bounded rationality, and how herd behavior affecting private information revelation. We also examine whether the individual investor in our security market has a behavior of herding. The results indicate that even if every investor is full rational, the herd behavior of investors may result in the bounded rationality of group trading. The difference in valuating the risky asset's value between traders and market makers make investor neglect his private information and imitate other investors' actions. The difference of risk aversion between traders and market maker, inventory positions, and multidimensional uncertainty may arise herd behavior. The private information will be revealed even if it may be strongly affected by the herd behavior. The empirical result indicates that small investors are inclined to selling herd behavior in...