Marked to Market Leverage with Zero-Intelligent Agents
published: Oct. 17, 2008, recorded: September 2008, views: 3195
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In liquid markets real-time mark-to-market portfolio valuations may not be expected to impact prices. However during illiquid periods with leveraged trading such settlement can have a significant impact on price volatility and trading-choices. While the assumption of efficient markets confers speculative traders with stabilizing attributes, liquidity or settlement trades can have destabilizing properties in the short run: traders buy when prices rise, and sell when prices fall, to meet collateral requirements. If there are a lot of traders in the market, this situation can become cumulative, producing positive autocorrelation in returns and volatility clustering. Such price dynamics, and a corresponding drying up of market liquidity, can occur even when traders are zero-intelligent, that is, their price expectations or risk aversion does not change in response to price changes.
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