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Market structure or traders’ behavior? An assessment of flash crash phenomena and their regulation based on a multi-agent simulation

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  • Nathalie Oriol

    () (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - CNRS - Centre National de la Recherche Scientifique - UNS - Université Nice Sophia Antipolis - UCA - Université Côte d'Azur)

  • Iryna Veryzhenko

    (LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action - CNAM - Conservatoire National des Arts et Métiers [CNAM])

Abstract

This paper aims at studying the flash crash caused by an operational shock with different market participants. We reproduce this shock in artificial market framework to study market quality in different scenarios, with or without strategic traders. We show that traders' srategies influence the magnitude of the collapse. But, with the help of zero-intelligence traders framework, we show that despite theabsence of market makers, the order-driven market is resilient and favors a price recovery. We find that a short-sales ban imposed by regulator reduces short-term volatility.

Suggested Citation

  • Nathalie Oriol & Iryna Veryzhenko, 2015. "Market structure or traders’ behavior? An assessment of flash crash phenomena and their regulation based on a multi-agent simulation," Working Papers halshs-01254435, HAL.
  • Handle: RePEc:hal:wpaper:halshs-01254435
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01254435
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    References listed on IDEAS

    as
    1. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
    2. Sandrine Jacob Leal & Mauro Napoletano & Andrea Roventini & Giorgio Fagiolo, 2016. "Rock around the clock: An agent-based model of low- and high-frequency trading," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 49-76, March.
    3. Olivier Brandouy & Philippe Mathieu & Iryna Veryzhenko, 2013. "On the Design of Agent-based Artificial Stock Markets," Post-Print hal-00826419, HAL.
    4. Bohl, Martin T. & Essid, Badye & Siklos, Pierre L., 2012. "Do short selling restrictions destabilize stock markets? Lessons from Taiwan," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 198-206.
    5. Adam C. Kolasinski & Adam Reed & Jacob R. Thornock, 2013. "Can Short Restrictions Actually Increase Informed Short Selling?," Financial Management, Financial Management Association International, vol. 42(1), pages 155-181, March.
    6. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p4oq9ig8k is not listed on IDEAS
    7. Yeh, Jin-Huei & Chen, Lien-Chuan, 2014. "Stabilizing the market with short sale constraint? New evidence from price jump activities," Finance Research Letters, Elsevier, vol. 11(3), pages 238-246.
    8. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner & Ladley, Dan, 2015. "Costs and benefits of financial regulation: Short-selling bans and transaction taxes," Journal of Banking & Finance, Elsevier, vol. 51(C), pages 103-118.
    9. Ashenfelter, Orley & Card, David, 1985. "Using the Longitudinal Structure of Earnings to Estimate the Effect of Training Programs," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 648-660, November.
    10. Eric C. Chang & Joseph W. Cheng & Yinghui Yu, 2007. "Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market," Journal of Finance, American Finance Association, vol. 62(5), pages 2097-2121, October.
    11. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February.
    12. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    13. Benjamin Cohen & Hyun Song Shin, 2002. "Positive feedback trading under stress: evidence from the US Treasury securities market," BIS Papers chapters,in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 148-180 Bank for International Settlements.
    14. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    15. Paul Brewer & Jaksa Cvitanic & Charles R. Plott, 2013. "Market microstructure design and flash crashes: A simulation approach," Journal of Applied Economics, Universidad del CEMA, vol. 16, pages 223-250, November.
    16. Sandrine Jacob Leal & Mauro Napoletano & Andrea Roventini & Giorgio Fagiolo, 2016. "Rock around the clock: An agent-based model of low- and high-frequency trading," Journal of Evolutionary Economics, Springer, vol. 26(1), pages 49-76, March.
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    More about this item

    Keywords

    flash crash; limit order book; technical trading; Agent-based modeling; zero-intelligence trader;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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