Overall fluctuations and fat tails in an artificial financial market: The two-sided impact of leveraged trading

• The impact of leveraged trading is studied on a one-stock artificial market.
• Both agent-based simulations and controlled human experiments are conducted.
• Leverage brings up overall fluctuations that represent the market risks.
• Leverage decreases the occurring rates of financial bubbles and crises.
• The leverage qualification and the margin call lead to the two-sided leverage impact.

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.