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A Dynamic Analysis of the Microstructure of Moving Average Rules in a Double Auction Market

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Abstract

Inspired by the theoretically oriented dynamic analysis of moving average rules in Chiarella, He and Hommes (CHH) (2006a) model, this paper conducts a dynamic analysis of a microstructure model of continuous double auctions in which the probability of heterogeneous agents to trade is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterise most of the stylized facts including the power-law behaviour of volatility. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp251.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 251.

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Length: 24
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:uts:rpaper:251

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Keywords: microstructure model; continuous double auctions; heterogeneous agents; stylized facts;

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