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A re-examination of the "zero is enough" hypothesis in the emergence of financial stylized facts

Author

Listed:
  • Olivier Brandouy

    (IAE Paris - Sorbonne Business School)

  • Angelo Corelli

    (LIU - Linköping University)

  • Iryna Veryzhenko

    (IAE Paris - Sorbonne Business School)

  • Roger Waldeck

    (LUSSI - Département Logique des Usages, Sciences sociales et Sciences de l'Information - UEB - Université européenne de Bretagne - European University of Brittany - Télécom Bretagne - IMT - Institut Mines-Télécom [Paris])

Abstract

In recent years, a growing literature has claimed that market microstructure is sufficient to generate the so-called stylized facts without any reference to behavioral assumptions of market players. Indeed, qualitative stylized-facts can be generated with ZIT but we claim that they are without any quantitative predictive power. We show that at coarse grain, in most of the cases, such qualitative stylized facts hide unrealistic price motions at the intraday level and ill-calibrated return processes as well. Generating "realistic" financial motions that reproduce quantitatively financial distributions is out-of-reach within the pure ZIT framework. To do so, one must increasingly constrain agents' choice sets up to a point where it is hard to claim that behaviour is completely random. In addition we show that even with highly constraining ZIT agents, one cannot reproduce real time series from these. Except in a few cases, neither of the first order moments of ZITs versus real data will be equal. We therefore claim that stylized facts produced by means of ZIT agents are useless for financial engineering.

Suggested Citation

  • Olivier Brandouy & Angelo Corelli & Iryna Veryzhenko & Roger Waldeck, 2012. "A re-examination of the "zero is enough" hypothesis in the emergence of financial stylized facts," Post-Print hal-00951015, HAL.
    • Handle: RePEc:hal:journl:hal-00951015
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    Cited by:

    1. Tijana Radivojević & Jonatha Anselmi & Enrico Scalas, 2014. "Ergodic Transition in a Simple Model of the Continuous Double Auction," PLOS ONE, Public Library of Science, vol. 9(2), pages 1-5, February.
    2. Hamza Bodor & Laurent Carlier, 2024. "Stylized Facts and Market Microstructure: An In-Depth Exploration of German Bond Futures Market," Papers 2401.10722, arXiv.org.
    3. Arifovic, Jasmina & He, Xue-zhong & Wei, Lijian, 2022. "Machine learning and speed in high-frequency trading," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).

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