Adaptation, Evolution And Financial Market Dynamics

Two major parts are included in my dissertation,In part one, the characteristics of the financial market dynamics is documented here by empirical studies. Firstly, the returns of different style stock portfolios are compared from the size and book-to-market investment styles. The paper finds that from 2000 to 2009, there is obvious style rotation phenomena in Chinese A share stock market and the returns of different style portfolios varies as time, and no arbitrage portfolio can always beat the market. Secondly, with the robustness tests of different style portfolios, Fama-French three factor model are used to explain the source of the excess returns of the portfolios. At last, theories about Adaptive Market Hypothesis by Lo are introduced to explain and analyze the market dynamics of the different style portfolios.In part two, an Agent-based Modeling approach is applied to investigate the impact of trader species'evolution to the market dynamics. It reveals that the effect of rational investor's decision making will vary when they encounter different kinks of irrational traders in the market. In the presence of positive feedback species, the rational investors with the learning ability powered by GA would not"correct"the price as the classical financial theories indicated. They would speculate the"wrong"price and, therefore, ride the bubbles to gain profit, instead. Finally, rational investors will chase the trend when facing positive feedback investors, and destabilize the price of the risky asset. When noise traders come into the market, with the limits of arbitrage, rational investors put more weights on fundamental analysis and decrease the trend, and then price of the risky asset converge to the fundamental value relatively.In a word, this paper studies the adaptation and evolution of the traders in the artificial stock market, and investigates the rules of the market dynamics.