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Adding to the Regulator's Toolbox: Integration and Extension of Two Leading Market Models

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  • Brian Tivnan
  • Matthew Koehler
  • Matthew McMahon
  • Matthew Olson
  • Neal Rothleder
  • Rajani Shenoy
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    Abstract

    As demonstrated during the recent financial crisis, regulators require additional analytical tools to assess systemic risk in the financial sector. This paper describes one such tool; namely a novel market modeling and analysis capability. Our model builds upon two leading market models: one which emphasizes market micro-structure and another which emphasizes an ecology of trading strategies. We address a limitation of market modeling, namely the consideration of only one dominant trading strategy (i.e., long positions). Our model aligns closely with several widely held stylized facts of financial markets. And a final contribution of this work stems from our empirical analysis of the fractal nature of both empirical markets and our market model.

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    File URL: http://arxiv.org/pdf/1105.5439
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1105.5439.

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    Date of creation: May 2011
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    Handle: RePEc:arx:papers:1105.5439

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    Web page: http://arxiv.org/

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    1. J. Doyne Farmer & Paolo Patelli & Ilija I. Zovko, 2003. "The Predictive Power of Zero Intelligence in Financial Markets," Papers cond-mat/0309233, arXiv.org, revised Feb 2004.
    2. Lux, T. & M. Marchesi, . "Scaling and Criticality in a Stochastic Multi-Agent Model of a Financial Market," Discussion Paper Serie B 438, University of Bonn, Germany, revised Jul 1998.
    3. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
    4. Robert Axtell & Robert Axelrod & Joshua M. Epstein & Michael D. Cohen, 1995. "Aligning Simulation Models: A Case Study and Results," Working Papers 95-07-065, Santa Fe Institute.
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