Selection mechanisms affect volatility in evolving markets
Dewhurst, David Rushing Van Oort, Colin M
Dewhurst, David Rushing
Van Oort, Colin M
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Abstract
Financial asset markets are sociotechnical systems whose constituent agents are subject to evolutionary pressure as unprofitable agents exit the marketplace and more profitable agents continue to trade assets. Using a population of evolving zero-intelligence agents and a frequent batch auction price-discovery mechanism as substrate, we analyze the role played by evolutionary selection mechanisms in determining macro-observable market statistics. Specifically, we show that selection mechanisms incorporating a local fitness-proportionate component are associated with high correlation between a micro, risk-aversion parameter and a commonly-used macro-volatility statistic, while a purely quantile-based selection mechanism shows significantly less correlation and is associated with higher absolute levels of fitness (profit) than other selection mechanisms. These results point the way to a possible restructuring of market incentives toward reduction in market-wide worst performance, leading profit-driven agents to behave in ways that are associated with beneficial macro-level outcomes.
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Date
2019-01-01