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Liquidity cost of market orders in the Taiwan Stock Market: A study based on an order-driven agent-based artificial stock market

Author

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  • Huang, Yi-Ping
  • Chen, Shu-Heng
  • Hung, Ming-Chin
  • Yu, Tina

Abstract

We developed an order-driven agent-based artificial stock market to analyze the liquidity costs of market orders in the Taiwan Stock Market (TWSE). The agent-based stock market was based on the DFGIS model proposed by Daniels, Farmer, Gillemot, Iori and Smith (Daniels et al., 2003). We also improved the DFGIS model by using two average order size parameters. When tested on 10 stocks and securities in the market, the model-simulated liquidity costs were higher than those of the TWSE data. We identified some possible factors that have contributed to this result: 1) the overestimated effective market order size, which can be improved by using two average order size parameters; 2) the random market order arrival time designed in the DFGIS model; 3) the zero-intelligence of the artificial agents in our model; and 4) the price of the effective market order. We continued improving the model so that it could be used to study liquidity costs and to devise liquidation strategies for stocks and securities traded in the Taiwan Stock Market.

Suggested Citation

  • Huang, Yi-Ping & Chen, Shu-Heng & Hung, Ming-Chin & Yu, Tina, 2012. "Liquidity cost of market orders in the Taiwan Stock Market: A study based on an order-driven agent-based artificial stock market," International Review of Financial Analysis, Elsevier, vol. 23(C), pages 72-80.
    • Handle: RePEc:eee:finana:v:23:y:2012:i:c:p:72-80
    DOI: 10.1016/j.irfa.2011.06.013
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    References listed on IDEAS

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    1. Robert F. Engle & Jeffrey R. Russell, 1998. "Autoregressive Conditional Duration: A New Model for Irregularly Spaced Transaction Data," Econometrica, Econometric Society, vol. 66(5), pages 1127-1162, September.
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