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Fundamentalists Clashing over the Book: A Study of Order-Driven Stock Markets

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  • Marco LiCalzi

    (Universita' di Venezia)

  • Paolo Pellizzari

    (Universita' di Venezia)

Abstract

Agent-based models of market dynamics must strike a compromise between the structural assumptions that represent the trading mechanism and the behavioral assumptions that describe the rules by which traders take their decisions. We present a structurally detailed model of an order- driven stock market and show that a minimal set of behavioral assumptions suffices to generate a leptokurtic distribution of short- term log-returns. This result backs up the conjecture that the emergence of some statistical properties of financial time series is due to the microstructure of stock markets.

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File URL: http://128.118.178.162/eps/comp/papers/0207/0207001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Computational Economics with number 0207001.

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Length: 19 pages
Date of creation: 12 Jul 2002
Date of revision: 04 Mar 2003
Handle: RePEc:wpa:wuwpco:0207001

Note: Type of Document - pdf; prepared on Macintosh; to print on Postcript; pages: 19; figures: included
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Web page: http://128.118.178.162

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Keywords: price dynamics; statistical properties of returns; behavioral and structural assumptions; agent-based simulations;

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  1. J. Doyne Farmer & Shareen Joshi, 2000. "The Price Dynamics of Common Trading Strategies," Working Papers 00-12-069, Santa Fe Institute.
  2. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  3. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  5. 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.
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  7. Steiglitz, Ken & Shapiro, Daniel, 1998. "Simulating the Madness of Crowds: Price Bubbles in an Auction-Mediated Robot Market," Computational Economics, Society for Computational Economics, vol. 12(1), pages 35-59, August.
  8. repec:att:wimass:9625 is not listed on IDEAS
  9. 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.
  10. W. Brian Arthur & John H. Holland & Blake LeBaron & Richard Palmer & Paul Taylor, 1996. "Asset Pricing Under Endogenous Expectation in an Artificial Stock Market," Working Papers 96-12-093, Santa Fe Institute.
  11. P. Bak & M. Paczuski & M. Shubik, 1996. "Price Variations in a Stock Market with Many Agents," Working Papers 96-09-075, Santa Fe Institute.
  12. Welch, Ivo, 2000. "Herding among security analysts," Journal of Financial Economics, Elsevier, vol. 58(3), pages 369-396, December.
  13. 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.
  14. Cohen, Kalman J, et al, 1978. "Limit Orders, Market Structure, and the Returns Generation Process," Journal of Finance, American Finance Association, vol. 33(3), pages 723-36, June.
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