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Modeling and simulation of a double auction artificial financial market

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  • Raberto, Marco
  • Cincotti, Silvano

Abstract

We present a double-auction artificial financial market populated by heterogeneous agents who trade one risky asset in exchange for cash. Agents issue random orders subject to budget constraints. The limit prices of orders may depend on past market volatility. Limit orders are stored in the book whereas market orders give immediate birth to transactions. We show that fat tails and volatility clustering are recovered by means of very simple assumptions. We also investigate two important stylized facts of the limit order book, i.e., the distribution of waiting times between two consecutive transactions and the instantaneous price impact function. We show both theoretically and through simulations that if the order waiting times are exponentially distributed, even trading waiting times are also exponentially distributed.

Suggested Citation

  • Raberto, Marco & Cincotti, Silvano, 2005. "Modeling and simulation of a double auction artificial financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 34-45.
    • Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:34-45
    DOI: 10.1016/j.physa.2005.02.061
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    References listed on IDEAS

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    1. Cincotti, Silvano & M. Focardi, Sergio & Marchesi, Michele & Raberto, Marco, 2003. "Who wins? Study of long-run trader survival in an artificial stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 227-233.
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    4. Raberto, Marco & Scalas, Enrico & Mainardi, Francesco, 2002. "Waiting-times and returns in high-frequency financial data: an empirical study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 314(1), pages 749-755.
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    6. Raberto, Marco & Cincotti, Silvano & Focardi, Sergio M. & Marchesi, Michele, 2001. "Agent-based simulation of a financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 319-327.
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    8. Gençay, Ramazan & Dacorogna, Michel & Muller, Ulrich A. & Pictet, Olivier & Olsen, Richard, 2001. "An Introduction to High-Frequency Finance," Elsevier Monographs, Elsevier, edition 1, number 9780122796715.
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    Cited by:

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    2. Oh, Gabjin & Kim, Ho-yong & Ahn, Seok-Won & Kwak, Wooseop, 2015. "Analyzing the financial crisis using the entropy density function," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 419(C), pages 464-469.
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    4. Liu, Xinghua & Gregor, Shirley & Yang, Jianmei, 2008. "The effects of behavioral and structural assumptions in artificial stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(11), pages 2535-2546.
    5. Juho Kanniainen & Robert Pich'e, 2012. "Stock Price Dynamics and Option Valuations under Volatility Feedback Effect," Papers 1209.4718, arXiv.org.
    6. Erika Corona & Sabrina Ecca & Michele Marchesi & Alessio Setzu, 2008. "The Interplay Between Two Stock Markets and a Related Foreign Exchange Market: A Simulation Approach," Computational Economics, Springer;Society for Computational Economics, vol. 32(1), pages 99-119, September.
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    8. Marko Petrovic & Bulent Ozel & Andrea Teglio & Marco Raberto & Silvano Cincotti, 2017. "Eurace Open: An agent-based multi-country model," Working Papers 2017/09, Economics Department, Universitat Jaume I, Castellón (Spain).
    9. Thiago W. Alves & Ionut Florescu & George Calhoun & Dragos Bozdog, 2020. "SHIFT: A Highly Realistic Financial Market Simulation Platform," Papers 2002.11158, arXiv.org, revised Aug 2020.

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