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Trader Behavior and its Effect on Asset Price Dynamics

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  • James Primbs
  • Muruhan Rathinam
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    Abstract

    In this paper, we present a natural mathematical framework to model trader behavior as a continuous time discrete event process, and derive stochastic differential equations for aggregate behavior and price dynamics by passing to diffusion limits. In particular, we model extraneous, value, momentum and hedge traders. Through analysis and numerical simulation we explore some of the effects these trading strategies have on price dynamics.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/13504860802583444
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 16 (2009)
    Issue (Month): 2 ()
    Pages: 151-181

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    Handle: RePEc:taf:apmtfi:v:16:y:2009:i:2:p:151-181

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    Web page: http://www.tandfonline.com/RAMF20

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    Related research

    Keywords: Trader behavior; price dynamics; stock pinning; diffusion limit; Poisson random measure;

    References

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    1. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-43.
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    9. E. Platen & M. Schweizer, 1997. "On Feedback Effects from Hedging Derivatives," SFB 373 Discussion Papers 1997,83, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
    10. Hull, John C & White, Alan D, 1987. " The Pricing of Options on Assets with Stochastic Volatilities," Journal of Finance, American Finance Association, vol. 42(2), pages 281-300, June.
    11. Marco Raberto & Silvano Cincotti & Sergio M. Focardi & Michele Marchesi, 2001. "Agent-based simulation of a financial market," Papers cond-mat/0103600, arXiv.org, revised Mar 2001.
    12. Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
    13. Johansen, Anders, 2004. "Probing human response times," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 338(1), pages 286-291.
    14. 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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