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Market impact shapes competitive advantage of investment strategies in financial markets

PloS one, 2022-02, Vol.17 (2), p.e0260373-e0260373 [Peer Reviewed Journal]

COPYRIGHT 2022 Public Library of Science ;2022 Xu, Zhong. This is an open access article distributed under the terms of the Creative Commons Attribution License: http://creativecommons.org/licenses/by/4.0/ (the “License”), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;2022 Xu, Zhong 2022 Xu, Zhong ;ISSN: 1932-6203 ;EISSN: 1932-6203 ;DOI: 10.1371/journal.pone.0260373 ;PMID: 35113865

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  • Title:
    Market impact shapes competitive advantage of investment strategies in financial markets
  • Author: Xu, Wen-Juan ; Zhong, Li-Xin
  • Yeung, Chi Ho
  • Subjects: Asset pricing ; Biology and Life Sciences ; Business competition ; Coevolution ; Competition ; Competitive advantage ; Economic aspects ; Efficient markets ; Evolution ; Financial markets ; Investment policy ; Investment strategy ; Investments ; Management ; Markets ; Models, Economic ; Phase transitions ; Physical Sciences ; Prices ; Pricing ; Research and Analysis Methods ; Risk ; Securities markets ; Social Sciences ; Stock exchanges
  • Is Part Of: PloS one, 2022-02, Vol.17 (2), p.e0260373-e0260373
  • Description: The formation of an efficient market depends on the competition between different investment strategies, which accelerates all available information into asset prices. By incorporating market impact and two kinds of investment strategies into an agent-based model, we have investigated the coevolutionary mechanism of different investment strategies and the role of market impact in shaping a competitive advantage in financial markets. The coevolution of history-dependent strategies and reference point strategies depends on the levels of market impact and risk tolerance. For low market impact and low risk tolerance, the majority-win effect makes the trend-following strategies become dominant strategies. For high market impact and low risk tolerance, the minority-win effect makes the trend-rejecting strategies coupled with trend-following strategies become dominant strategies. The coupled effects of price fluctuations and strategy distributions have been investigated in depth. A U-shape distribution of history-dependent strategies is beneficial for a stable price, which is destroyed by the existence of reference point strategies with low risk tolerance. A δ-like distribution of history-dependent strategies leads to a large price fluctuation, which is suppressed by the existence of reference point strategies with high risk tolerance. The strategies that earn more in an inefficient market lose more in an efficient market. Such a result gives us another explanation for the principle of risk-profit equilibrium in financial markets: high return in an inefficient market should be coupled with high risk in an efficient market, low return in an inefficient market should be coupled with low risk in an efficient market.
  • Publisher: United States: Public Library of Science
  • Language: English
  • Identifier: ISSN: 1932-6203
    EISSN: 1932-6203
    DOI: 10.1371/journal.pone.0260373
    PMID: 35113865
  • Source: GFMER Free Medical Journals
    MEDLINE
    PubMed Central
    Public Library of Science (PLoS)
    ProQuest Central
    DOAJ Directory of Open Access Journals
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