Breeds of risk-adjusted fundamentalist strategies in an order- driven market
AbstractThis paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value-based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid-ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts.
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Bibliographic InfoPaper provided by EconWPA in its series Computational Economics with number 0506001.
Length: 17 pages
Date of creation: 08 Jun 2005
Date of revision:
Note: Type of Document - pdf; pages: 17
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price dynamics; statistical properties of returns; market microstructure; agent-based simulations;
Other versions of this item:
- LiCalzi, Marco & Pellizzari, Paolo, 2006. "Breeds of risk-adjusted fundamentalist strategies in an order-driven market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 359(C), pages 619-633.
- C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-14 (All new papers)
- NEP-CMP-2005-06-14 (Computational Economics)
- NEP-FMK-2005-06-14 (Financial Markets)
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