Breeds of risk-adjusted fundamentalist strategies in an order-driven market
AbstractThis paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value-based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid–ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts.
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Bibliographic InfoArticle provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.
Volume (Year): 359 (2006)
Issue (Month): C ()
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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/
Price dynamics; Statistical properties of returns; Market microstructure; Agent-based simulations;
Other versions of this item:
- Marco LiCalzi & Paolo Pellizzari, 2005. "Breeds of risk-adjusted fundamentalist strategies in an order- driven market," Computational Economics 0506001, EconWPA.
- C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
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