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Do Stylised Facts of Order Book Markets Need Strategic Behaviour?

  • Dan Ladley

    (University of Leeds, Business School)

  • Klaus Reiner Schenk-Hoppe

    (University of Leeds, School of Mathematics)

This paper studies the role of strategy and the order book market mechanism in price dynamics and the order flow behaviour. To this end we analyse a zero-intelligence agent model of a dynamic limit order market. Stylised facts of limit order markets are shown to be influenced and, in some cases, governed by the market mechanism rather than strategic interaction. Positive correlation in order types, for instance, is the result of the market architecture, and price movements may be predicted in the short term from analysing the state of the order book. In contrast the absolute probabilities of order submission highlight the contribution of strategic behaviour.

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File URL: http://ssrn.com/abstract=1008858
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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 07-20.

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Length: 24 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:chf:rpseri:rp0720
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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