How do AI traders affect market volatility?
A Multi-agent Market Model Can Explain the Impact of AI Traders in Financial Markets - A New Microfoundations of GARCH model
September 20, 2024
https://arxiv.org/pdf/2409.12516This paper examines how the presence of AI traders in financial markets, alongside other trader types, impacts market volatility and price formation. The researchers build a multi-agent model that derives the well-established GARCH(1,1) model from the micro-level interactions of these different trader types (noise, fundamental, and AI-driven).
Key takeaways for LLM-based multi-agent systems:
- AI agents introduce unique market dynamics: The presence of AI traders introduces sensitivity to past shocks and can amplify market responses.
- Microfoundations are crucial: Understanding how macro-level market phenomena emerge from the micro-level behaviors of individual agents, especially AI, is vital for building accurate models.
- This study validates a theoretical model with simulations: This approach, combining mathematical analysis with agent-based simulations, offers a valuable framework for building and analyzing LLM-based multi-agent systems, especially when studying emergent behaviors in complex environments like financial markets.