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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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Bibliographic Info

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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  1. Xue-Zhong (Tony) He & Carl Chiarella, 2001. "Asset Price and Wealth Dynamics under Heterogeneous Expectations," CeNDEF Workshop Papers, January 2001, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Lux, Thomas, 2008. "Stochastic behavioral asset pricing models and the stylized facts," Economics Working Papers 2008,08, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Chiarella, Carl & Dieci, Roberto & He, Xue-Zhong, 2007. "Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework," Journal of Economic Behavior & Organization, Elsevier, vol. 62(3), pages 408-427, March.
  4. Cars H. Hommes, 2001. "Financial Markets as Nonlinear Adaptive Evolutionary Systems," Tinbergen Institute Discussion Papers 01-014/1, Tinbergen Institute.
  5. Xue-Zhong He & Youwei Li, 2008. "Heterogeneity, convergence, and autocorrelations," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 59-79.
  6. Paolo Pellizzari & Frank Westerhoff, 2009. "Some effects of transaction taxes under different microstructures," Working Papers 190, Department of Applied Mathematics, Università Ca' Foscari Venezia.
  7. Cars Hommes & Carl Chiarella & Xue-Zhong He, 2004. "A Dynamical Analysis of Moving Average Rules," Computing in Economics and Finance 2004, Society for Computational Economics 238, Society for Computational Economics.
  8. Chiarella, Carl & He, Xue-Zhong & Hommes, Cars, 2006. "Moving average rules as a source of market instability," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 370(1), pages 12-17.
  9. Carl Chiarella & Giulia Iori & Josep Perello, 2007. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Papers 0711.3581, arXiv.org.
  10. Maslov, Sergei, 2000. "Simple model of a limit order-driven market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 278(3), pages 571-578.
  11. Carl Chiarella & Giulia Iori, 2002. "A simulation analysis of the microstructure of double auction markets," Quantitative Finance, Taylor & Francis Journals, vol. 2(5), pages 346-353.
  12. Cars H. Hommes, 2001. "Financial Markets as Nonlinear Adaptive Evolutionary Systems," Tinbergen Institute Discussion Papers 01-014/1, Tinbergen Institute.
  13. De Grauwe, Paul & Grimaldi, Marianna, 2006. "Exchange rate puzzles: A tale of switching attractors," European Economic Review, Elsevier, vol. 50(1), pages 1-33, January.
  14. Carl Chiarella & Roberto Dieci & Laura Gardini, 2001. "Speculative Behaviour and Complex Asset Price Dynamics," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 49, Quantitative Finance Research Centre, University of Technology, Sydney.
  15. Carl Chiarella & Xue-Zhong He, 2000. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model with a Market Maker," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 35, Quantitative Finance Research Centre, University of Technology, Sydney.
  16. Marco Licalzi & Paolo Pellizzari, 2003. "Fundamentalists clashing over the book: a study of order-driven stock markets," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 470-480.
  17. He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3396-3426, October.
  18. Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics.
  19. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, Elsevier, vol. 3(1), pages 15-102, May.
  20. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  21. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 231, Quantitative Finance Research Centre, University of Technology, Sydney.
  22. Carl Chiarella & Roberto Dieci & Laura Gardini, 2005. "The Dynamic Interaction of Speculation and Diversification," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(1), pages 17-52.
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Cited by:
  1. Paolo Pellizzari & Dan Ladley, 2014. "The simplicity of optimal trading in order book markets," Working Papers 2014:05, Department of Economics, University of Venice "Ca' Foscari".

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