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Modeling and simulation of a double auction artificial financial market

  • Raberto, Marco
  • Cincotti, Silvano

We present a double-auction artificial financial market populated by heterogeneous agents who trade one risky asset in exchange for cash. Agents issue random orders subject to budget constraints. The limit prices of orders may depend on past market volatility. Limit orders are stored in the book whereas market orders give immediate birth to transactions. We show that fat tails and volatility clustering are recovered by means of very simple assumptions. We also investigate two important stylized facts of the limit order book, i.e., the distribution of waiting times between two consecutive transactions and the instantaneous price impact function. We show both theoretically and through simulations that if the order waiting times are exponentially distributed, even trading waiting times are also exponentially distributed.

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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 355 (2005)
Issue (Month): 1 ()
Pages: 34-45

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Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:34-45
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  1. Marco Raberto & Enrico Scalas & Francesco Mainardi, 2004. "Waiting-times and returns in high-frequency financial data: an empirical study," Finance 0411014, EconWPA.
  2. 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.
  3. Daniel Friedman, 1982. "Price Formation in Double Auction Markets," UCLA Economics Working Papers 278, UCLA Department of Economics.
  4. Marco Raberto & Silvano Cincotti & Sergio M. Focardi & Michele Marchesi, 2001. "Agent-based simulation of a financial market," Papers cond-mat/0103600,, revised Mar 2001.
  5. Cincotti, Silvano & M. Focardi, Sergio & Marchesi, Michele & Raberto, Marco, 2003. "Who wins? Study of long-run trader survival in an artificial stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 227-233.
  6. Mendelson, Haim, 1982. "Market Behavior in a Clearing House," Econometrica, Econometric Society, vol. 50(6), pages 1505-24, November.
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