Overall Fluctuations and Fat Tails in an Artificial Financial Market: the Two-Sided Impact of Leveraged Trading

Recent years have seen leveraged trading playing an increasingly important role in financial markets. However, the effect of leverage on the markets is still an open question. Here, we introduce a framework to investigate leveraged trading through both agent-based simulations and controlled human experiments on a one-stock artificial market. It shows that leverage increases the market risks, and at the same time decreases the outbreak probabilities of financial bubbles or crises. This work helps to understand the impact of leverage on financial markets appropriately.