Speculative trades and financial regulations: simulations based on genetic programming

By exploring a two-dimensional parameter space, the paper pinpoints the area where speculative trades can contribute to the reduction of price volatility and are hence imperative for market efficiency. This area is delimited by a rather restrictive financial regulations imposed on an inherently unstable economy. Specifically, depending on the associated financial regulations, the authors´ GP-based simulations of cobweb markets show that speculative trades may reduce price volatility by 20% to 50% in an inherently unstable economy; on the other hand they may also increase price volatility by 300% to 3000%. The paper generalizes the earlier finding by Chen and Yeh (1997), which basically shows that in an inherently stable economy, speculative trades can only be destabilizing