Information,Investor Behavior And Market Instability

This paper focuses on the market instability,which means asset price fluctuates dramatically.Based on EMH,market instability is caused by information only.However,there are some researches and facts show that market instability can occur even if there is no information.In order to solve this debate,we try to set up simulated and computable market,a series of dynamic equations,to describe how the information has an effect on the decision-making of traders and the formation of price.And then we research on the formation mechanism of market instability and testify how the information and investor behavior play a role in the market instability with many controllable and repeatable experiments.Information is divided into endogenous information and exogenous information.Accordingly,two parts are involved in this paper:1.The research on the endogenous information and investor behavior.In this part,we describe the nonlinear interactions between informed traders and uninformed traders and formation of asset price characterized by the interactions of heterogeneous agents with a modified version of Diks(2008)’s model.We found that endogenous information could induce the market instability on the condition that information cost is high enough.Besides,we found that the dynamics become locally unstable and prices may deviate far from the fundamental price,routing to chaos through bifurcation,with decreasing memory length of the uninformed traders,which also means the increasing rationality of uninformed trader.2.The research on the exogenous information and investor behavior.In this part,taking into consideration the behavior of investors with bounded rationality,we use Prospect Theory to set up a model to describe the decision-making of the investors with bounded rationality in the stock market,which include the information trader and the noise trader,as well as the states of market.On the foundation of the study on the stability of the model and the outputs of simulated experimental market,we research the inducement of instability of stock market from the stagnant to the flourishing.And we found:(1)During the stagnant,the market reaction to bad news is bigger than that of the good news because of the liquidity risk.Only extremely good news could make market leave from the stagnant.(2)While the transition,the market is instable,and the reaction to both bad and good news is sensitive.Good news makes the market flourishing and bad news leads to a sluggish market.(3)In the boom period,the good news could induce the bigger response than the bad news.The better the news is,the more unstable market is.But the role of exogenous information in the market instability is limited by the fraction of informed trader,because information just plays a part in the traders who are affected by this news,but their potency is small for the traders who are not affected by it.We also found with increasing in the decision weight of the trader,even if a small part of trader,the market would route to chaos through bifurcation once the decision weight was beyond the area of stability,whether there is information or not in the market.So the enhance of decision weight is the important behavioral factor to the market instability.These conclusions shows both endogenous and exogenous information could induce market instability and so do behavioral factor.In this way,this paper reveals a strikingly simple economic intuition why the stock market instability or crisis occurs when there is no information.All these conclusions help us better understand how to use information to regulate market,what is more,make great contribution to maintaining the stability of the stock market.