Network Centrality and Stock Market Volatility: The Impact of Communication Topologies on Prices

We investigate the impact of agent communication networks on prices in an artificial stock market. Networks with different centralization measures are tested for their effect on the volatility of prices. Trading strategies diffuse through the different network topologies, mimetic contagion arises through the adaptive behavior of the heterogeneous agents. Short trends may trigger cascades of buy and sell orders due to increased diffusion speed within highly centralized communication networks. Simulation results suggest a correlation between the network centralization measures and the volatility of the resulting stock prices. 1 Chair of Information Systems, esp. Simulation, Technische Hochschule Mittelhessen, University of Applied Sciences, Wilhelm-Leuschner-Straße 13, 61169 Friedberg, Germany, e-mail: [email protected] 2 Goethe-University Frankfurt, Institute of Information Systems, IT-based Logistics, Grüneburgplatz 1, 60325 Frankfurt am Main, Germany, e-mail: [email protected] 3 Chair of Business Administration, esp. Finance, Ostfalia University of Applied Sciences, Robert-Koch-Pl. 10-14, 38440 Wolfsburg, Germany, e-mail: [email protected] Article Info: Received : January 26, 2012. Revised : February 27, 2012 Published online : February 28, 2012 200 Network Centrality and Stock Market Volatility JEL classification numbers: D40, D84, D85, G12