Speculation, efficiency, and competition in a zero-sum minority game with mixed strategies

Abstract

A new mechanism of financial markets driven in the information efficient regime is presented in the minority game. We introduce a zero-sum wealth pay-off and mixed strategies in the minority game with dynamic capitals. With the zero-sum wealth pay-off, intermittent volatility clustering is found in between regions of absorbing states. The absorbing dynamics disappear when the agents are using mixed strategies. Our model is able to capture a range of stylized facts observed in real financial data such as clustering of volatilities, long-range volatility correlation, and fat tails in the distribution of returns. While it is found to be important in the recovery of stylized facts, mixed strategies does not guarantee a better market speculation and on the average agents using them are being outperformed by those who are not.