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A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions

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Author Info
Giulia Iori (University of Essex)

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Abstract

We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. In the model, synchronization effects, which generate large fluctuations in returns, can arise purely from communication and imitation among traders. The key element in the model is the introduction of a trade friction which, by responding to price movements, creates a feedback mechanism on future trading and generates volatility clustering. The model also reproduces the empirically observed positive cross- correlation between volatility and trading volume.

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File URL: http://129.3.20.41/eps/fin/papers/0004/0004007.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 0004007.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 28 pages
Date of creation: 25 Jul 2000
Date of revision:
Handle: RePEc:wpa:wuwpfi:0004007

Note: Type of Document - Tex; prepared on unix; to print on PostScript; pages: 28; figures: included
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Web page: http://129.3.20.41

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Related research
Keywords: Volatility clustering; fat tails; trading volume; herd behaviour.;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C63 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computational Techniques

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  1. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  2. Jean-Philippe Bouchaud, 2000. "Power-laws in economics and finance: some ideas from physics," Science & Finance (CFM) working paper archive 500023, Science & Finance, Capital Fund Management. [Downloadable!]
  3. Andrea Morone, 2004. "Financial Market in the Laboratory," Experimental 0401002, EconWPA. [Downloadable!]
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  4. Xue-Zhong He, 2003. "Asset Pricing, Volatility and Market Behaviour: A Market Fraction Approach," Research Paper Series 95, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
  5. Xue-Zhong He & Youwei Li, 2005. "Long Memory, Heterogeneity and Trend Chasing," Research Paper Series 148, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  6. Carl Chiarella & Tony He, 1999. "Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model," Research Paper Series 18, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  7. Marco LiCalzi & Paolo Pellizzari, 2005. "Breeds of risk-adjusted fundamentalist strategies in an order- driven market," Computational Economics 0506001, EconWPA. [Downloadable!]
  8. Andrea Morone, 2005. "Financial Market in the Laboratory, an Experimental Analysis of some Stylized Facts," Papers on Strategic Interaction 2005-27, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
    Other versions:
  9. Catherine Kyrtsou & Michel Terraza, 2003. "Is it Possible to Study Chaotic and ARCH Behaviour Jointly? Application of a Noisy Mackey–Glass Equation with Heteroskedastic Errors to the Paris Stock Exchange Returns Series," Computational Economics, Springer, vol. 21(3), pages 257-276, June. [Downloadable!] (restricted)
  10. Alfarano, Simone & Lux, Thomas, 2005. "A noise trader model as a generator of apparent financial power laws and long memory," Economics Working Papers 2005,13, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
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  11. Constantinos VORLOW & Antonios ANTONIOU & Catherine KYRTSOU, 2004. "Surrogate Data Analysis and Stochastic Chaotic Modelling: Application to Stock Exchange Returns Series," Computing in Economics and Finance 2004 27, Society for Computational Economics. [Downloadable!]
  12. Catherine Kyrtsou & Michel Terraza, 2000. "Is It Possible To Study Jointly Chaotic And Arch Behaviour? Application Of A Noisy Mackey-Glass Equation With Heteroskedastic Errors To The Paris Stock Exchange," Computing in Economics and Finance 2000 Z226, Society for Computational Economics. [Downloadable!]
  13. Xue-Zhong He & Youwei Li, 2005. "Heterogeneity, Profitability and Autocorrelations," Research Paper Series 147, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  14. Alfarano, Simone & Lux, Thomas, 2006. "A minimal noise trader model with realistic time series properties," Economics Working Papers 2006,11, Christian-Albrechts-University of Kiel, Department of Economics. [Downloadable!]
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  15. J. Doyne Farmer & Shareen Joshi, 2000. "The Price Dynamics of Common Trading Strategies," Working Papers 00-12-069, Santa Fe Institute.
    Other versions:
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