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Analysis of a decision model in the context of equilibrium pricing and order book pricing

Author

Listed:
  • Wagner, D.C.
  • Schmitt, T.A.
  • Schäfer, R.
  • Guhr, T.
  • Wolf, D.E.

Abstract

An agent-based model for financial markets has to incorporate two aspects: decision making and price formation. We introduce a simple decision model and consider its implications in two different pricing schemes. First, we study its parameter dependence within a supply–demand balance setting. We find realistic behavior in a wide parameter range. Second, we embed our decision model in an order book setting. Here, we observe interesting features which are not present in the equilibrium pricing scheme. In particular, we find a nontrivial behavior of the order book volumes which reminds of a trend switching phenomenon. Thus, the decision making model alone does not realistically represent the trading and the stylized facts. The order book mechanism is crucial.

Suggested Citation

  • Wagner, D.C. & Schmitt, T.A. & Schäfer, R. & Guhr, T. & Wolf, D.E., 2014. "Analysis of a decision model in the context of equilibrium pricing and order book pricing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 347-353.
    • Handle: RePEc:eee:phsmap:v:415:y:2014:i:c:p:347-353
    DOI: 10.1016/j.physa.2014.08.013
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    Cited by:

    1. Meudt, Frederik & Schmitt, Thilo A. & Schäfer, Rudi & Guhr, Thomas, 2016. "Equilibrium pricing in an order book environment: Case study for a spin model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 453(C), pages 228-235.
    2. Yang, G. & Chen, Y. & Huang, J.P., 2016. "The highly intelligent virtual agents for modeling financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 443(C), pages 98-108.
    3. Frederik Meudt & Thilo A. Schmitt & Rudi Schafer & Thomas Guhr, 2015. "Equilibrium Pricing in an Order Book Environment: Case Study for a Spin Model," Papers 1502.01125, arXiv.org.

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