Herding effects in order driven markets: the rise and fall of gurus

Gabriele Tedeschi, Giulia Iori, Mauro Gallegati
Work package: 
WP 7
Publication number: 
01 October 2011

We introduce an order driver market model with heterogeneous traders that imitate each other on a dynamic network structure. The communication structure evolves endogenously via a fitness mechanism based on agents performance. We assess under which assumptions imitation, among noise traders, can give rise to the emergence of gurus and their rise and fall in popularity over time. We study the wealth distribution of gurus, followers and non followers and show that traders have an incentive to imitate and a desire to be imitated since herding turns out to be profi table. The model is then used to study the e ffect that di erent competitive strategies (i.e chartist & fundamentalist) have on agents performance. Our fi ndings show that positive intelligence agents can not invade a market populated by noise traders when herding is high.

Keywords: dynamic network, herding, guru, order driver market