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Price Formation in an Artificial Market: Limit Order Book Versus Matching of Supply and Demand

In: Nonlinear Dynamics and Heterogeneous Interacting Agents

Author

Listed:
  • Marco Raberto

    (DIBE, Università di Genova)

  • Silvano Cincotti

    (DIBE, Università di Genova)

  • Christian Dose

    (DIBE, Università di Genova)

  • Sergio M. Focardi

    (The Intertek Group)

  • Michele Marchesi

    (DIEE, Università di Cagliari, Piazza d'Armi)

Abstract

Summary In this paper, we present an extension of the Genoa artificial stock market (GASM) (Raberto et al., 2001) that includes a limit order book as mechanism for price formation. At every time step an agent is chosen with uniform distribution to issue an order. The order can be a limit order or a market order. If the order is a limit order, it is stored in the book; if the order is a market order, a transaction occurs. Prices are formed at variable time steps, i.e., only when a market order is issued. We investigate how the new asynchronous trading mechanism affects the statistical properties of simulated prices. This computational experiment shows that the fat tails of the returns distribution can be recovered simply as a consequence of the limit order book without any additional assumption on agents' behavior.

Suggested Citation

  • Marco Raberto & Silvano Cincotti & Christian Dose & Sergio M. Focardi & Michele Marchesi, 2005. "Price Formation in an Artificial Market: Limit Order Book Versus Matching of Supply and Demand," Lecture Notes in Economics and Mathematical Systems, in: Thomas Lux & Eleni Samanidou & Stefan Reitz (ed.), Nonlinear Dynamics and Heterogeneous Interacting Agents, pages 305-315, Springer.
    • Handle: RePEc:spr:lnechp:978-3-540-27296-0_20
    DOI: 10.1007/3-540-27296-8_20
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    Citations

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    Cited by:

    1. Peter Fratrič & Giovanni Sileno & Sander Klous & Tom Engers, 2022. "Manipulation of the Bitcoin market: an agent-based study," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-29, December.
    2. Derveeuw, Julien & Beaufils, Bruno & Mathieu, Philippe & Brandouy, Olivier, 2007. "Testing double auction as a component within a generic market model architecture," MPRA Paper 4918, University Library of Munich, Germany.
    3. Luisanna Cocco & Michele Marchesi, 2016. "Modeling and Simulation of the Economics of Mining in the Bitcoin Market," PLOS ONE, Public Library of Science, vol. 11(10), pages 1-31, October.
    4. Luisanna Cocco & Giulio Concas & Michele Marchesi, 2017. "Using an artificial financial market for studying a cryptocurrency market," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 12(2), pages 345-365, July.

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