Investor Behavior And Impact On Market Prices

Financial markets are full of uncertainties. The movement and volatility in stock prices has been the focus of attention for scholars all the time. Over the last decades, financial markets gain influence both at people’s life and country’s economics as a result of technological advances, financial liberalization, and ongoing international trade. On one hand, participant’s property and investor’s market performance are impacted by price fluctuation. On the other hand, the development of national economic is closely interrelated to the stability of financial markets. In this effect, the understanding of investors’ designing making and how it affect the market price movement is of vital interest to both researchers and economic policy makers.First of all, my thesis makes a contribution to understand dynamics of collective decision making. Some experiments with different composition of males or females as well as different composition of risk profile are made. Their risk profile of participants is obtained form Lottery-choice. In the financial market experiment, some fundamental states are examined. At the same time, participants create excessive risk taking at market level in some other experiments. One of the specific purposes of this study is to introduce tool which is a variety based on $-Game to understand the origins behind excessive risk taking formed in collective decision making. In general, this tool can calculate the probability of excessive risk taking with giving parameters. It depends on market temperature T, memory length m and risk profile. For each specific experiment, this tool also can be used to show what is expected to emerge.Second, this thesis also contributes to the growing research on price change affected by human’s behavior. We study the switching of trading strategies and its effect on the market volatility in a continuous double auction market. We describe the behavior when some uninformed agents, who we call switchers, decide whether or not to pay for information before they trade. By paying for the information they behave as informed traders. The relationship between switching and the market volatility under different structures of investors are considered. We find that there exists a positive relationship between the market volatility and the percentage of switchers. We therefore conclude that the switchers are a destabilizing factor in the market. However, for a given fixed percentage of switchers, the proportion of switchers that decide to buy information at a given moment of time is negatively related to the current market volatility. In other words, if more agents pay for information to know the fundamental value at some time, the market volatility will be lower. This is because the market price is closer to the fundamental value due to information diffusion between switchers.Above studies contribute to identify the early warning signals and thereby be helpful for stock exchanges to carry the risk controlling mechanisms promptly. Trading halt is one of microstructure mechanisms in equity market designed to temporarily stop trading during the period of extremely price movement or of the announcement of significant events. As one specific market environment, it is also worthful to study traders afterhalts behavior and to explore how the market response under this specific circumstance. Therefore we further study the dynamics of several financial measures after the trading halts. The dynamics share the same pattern with a sharp peak and a power law relaxation. Inter-day halts are most effective, while one-day halts are least effective. In case of intraday halts and one-day halts, positive events decay faster. Conversely, in case of inter-day halts, negative events decay faster.