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Fundamentalists clashing over the book: a study of order-driven stock markets

  • Marco Licalzi
  • Paolo Pellizzari

Agent-based models of market dynamics must strike a compromise between the structural assumptions that represent the trading mechanism and the behavioural assumptions that describe the rules by which traders make their decisions. We present a structurally detailed model of an order-driven stock market and show that a minimal set of behavioural assumptions suffices to generate a leptokurtic distribution of short-term log-returns. This result supports 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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Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 3 (2003)
Issue (Month): 6 ()
Pages: 470-480

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Handle: RePEc:taf:quantf:v:3:y:2003:i:6:p:470-480
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  1. P. Bak & M. Paczuski & M. Shubik, 1996. "Price Variations in a Stock Market with Many Agents," Working Papers 96-09-075, Santa Fe Institute.
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  7. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  8. 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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