Buying on margin, selling short in an agent-based market model

Credit trading, or leverage trading, which includes buying on margin and selling short, plays an important role in financial markets, where agents tend to increase their leverages for increased profits. This paper presents an agent-based asset market model to study the effect of the permissive leverage level on traders’ wealth and overall market indicators. In this model, heterogeneous agents can assume fundamental value-converging expectations or trend-persistence expectations, and their effective demands of assets depend both on demand willingness and wealth constraints, where leverage can relieve the wealth constraints to some extent. The asset market price is determined by a market maker, who watches the market excess demand, and is influenced by noise factors. By simulations, we examine market results for different leverage ratios. At the individual level, we focus on how the leverage ratio influences agents’ wealth accumulation. At the market level, we focus on how the leverage ratio influences changes in the asset price, volatility, and trading volume. Qualitatively, our model provides some meaningful results supported by empirical facts. More importantly, we find a continuous phase transition as we increase the leverage threshold, which may provide a further prospective of credit trading.