Price variation limits and financial market bubbles: Artificial market simulations with agents´ learning process

Financial exchanges sometimes employ a “price variation limit”, which restrict trades out of certain price ranges within certain time spans to avoid sudden large price fluctuations. We built an artificial market model implementing a learning process to replicate bubbles that has the continues double auction mechanism and investigated price variation limits. We surveyed an adequate limitation price range and an adequate limitation time span for the price variation limit and found a parameters´ condition of the price variation limit to prevent bubbles. The price variation limits are expected to be an especially effective way to prevent bubbles, so the model should be able to replicate bubbles. When we gave a bubble-inducing trigger, which is a rapid increment of the fundamental value, a bubble occurred in the case in which the model implemented the learning process and did not occur in the case without the process. We also showed that a hazard rate enables verification of whether the models can replicate a bubble process or not.