When investors group together and follow investment strategies it can lead to greater fluctuation in market prices.
That’s one of the key findings of a new academic study which considered the ‘ecology of investors’ and how networks of investors may influence pricing.
"Traditionally it has been thought that the stock market is efficient and the investors are completely rational and process all the available information quickly,” explains Jyrki Piilo from the Department of Physics and Astronomy who led the research group at Finland’s University of Turku. “However, many external incentives and internal factors can influence people's behaviour and decision-making ability - also in the stock market.”
The Finnish-Italian research group studied the ecology of investors in the financial market by examining the trading of individual investors with Nokia stock in 1995-2009, a period which included the dot-com bubble at the turn of the millennium and the financial crisis of 2008.
By constructing clusters of investors who used similar investment strategies, the researchers were able to study their ecology.
The results show that the number of strategies used in the markets and the volatility of the markets are connected: prices changed more evenly when investors used fewer strategies.
"And vice versa: the more there are strategies, the more the prices fluctuate. However, on the basis of the study, we cannot draw conclusions on which one is the cause and which one the effect," says Piilo.
The research results were published in the Palgrave Communications journal.
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