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The trading rectangle strategy within book models

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  • Matassini, Lorenzo

Abstract

We introduce a model of trading where traders interact through the insertion of orders in the book. This matching mechanism is a collection of the activity of agents: They can trade at the market price or place a limit order. The latter is valid until cancelled by the trader; to this end we introduce a threshold in time after which the probability of the order to be removed is strongly increased. There is essentially no source of randomness and all the traders share a common strategy, what we call trading rectangle. Since there are no fundamentalist rules, it is not so important to identify the right moment to enter in the market. Much more effort is required to decide when to sell. The model is able to reproduce many of the complex phenomena manifested in real stock markets, including the positive correlation between bid/ask spreads and volatility.

Suggested Citation

  • Matassini, Lorenzo, 2001. "The trading rectangle strategy within book models," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 301(1), pages 449-456.
    • Handle: RePEc:eee:phsmap:v:301:y:2001:i:1:p:449-456
    DOI: 10.1016/S0378-4371(01)00405-8
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    References listed on IDEAS

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    1. Adrian Dragulescu & Victor M. Yakovenko, 2000. "Statistical mechanics of money," Papers cond-mat/0001432, arXiv.org, revised Aug 2000.
    2. Thomas Lux & Michele Marchesi, 1999. "Scaling and criticality in a stochastic multi-agent model of a financial market," Nature, Nature, vol. 397(6719), pages 498-500, February.
    3. Matassini, Lorenzo & Franci, Fabio, 2001. "On financial markets trading," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 289(3), pages 526-542.
    4. Sornette, Didier & Johansen, Anders, 1997. "Large financial crashes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 245(3), pages 411-422.
    5. Lorenzo Matassini & Fabio Franci, 2001. "How Traders enter the Market through the Book," Papers cond-mat/0103106, arXiv.org.
    6. Gian-Italo Bischi & Vincenzo Valori, 2000. "Nonlinear effects in a discrete-time dynamic model of a stock market," Working Papers - Mathematical Economics 2000-01, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    7. Franci, Fabio & Marschinski, Robert & Matassini, Lorenzo, 2001. "Learning the optimal trading strategy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(1), pages 213-225.
    8. Bak, P. & Paczuski, M. & Shubik, M., 1997. "Price variations in a stock market with many agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 246(3), pages 430-453.
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