Learning and Evolution of Trading Strategies in Limit Order Markets
How do traders process and learn from market information, what trading strategies should they use, and how does learning affect the market? This paper proposes a learning model of an arti cial limit order market with asymmetric information to address these issues. Using a genetic algorithm as a learning mechanism, we show that learning, in particular the learning from uninformed traders, improves market informational efficiency and has a significant impact on the stylized facts of limit order markets, order submission, liquidity supply and consumption, the hump shaped order book near the quote, and the bid-ask spread. Moreover, the learning affects the evolution process of the trading strategies for all traders. The model provides some insights into market efficiency, the interaction of traders, the dynamics of limit order books, and the evolution of trading strategies.
|Date of creation:||01 Aug 2013|
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- Lukas Menkhoff & Carol L. Osler & Maik Schmeling, 2010.
"Limit-Order Submission Strategies under Asymmetric Information,"
CESifo Working Paper Series
3054, CESifo Group Munich.
- Menkhoff, Lukas & Osler, Carol L. & Schmeling, Maik, 2010. "Limit-order submission strategies under asymmetric information," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2665-2677, November.
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- Dugast, J., 2013. "Limited attention and news arrival in limit order markets," Working papers 449, Banque de France.
- Chiarella, C. & Iori, G. & Perello, J., 2008.
"The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows,"
08/04, Department of Economics, City University London.
- Carl Chiarella & Giulia Iori, 2005. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Research Paper Series 152, Quantitative Finance Research Centre, University of Technology, Sydney.
- Carl Chiarella & Giulia Iori & Josep Perello, 2007. "The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows," Papers 0711.3581, arXiv.org.
- Keim, Donald B. & Madhavan, Ananth, 1995. "Anatomy of the trading process Empirical evidence on the behavior of institutional traders," Journal of Financial Economics, Elsevier, vol. 37(3), pages 371-398, March.
- Yan, Yuxing & Zhang, Shaojun, 2012. "An improved estimation method and empirical properties of the probability of informed trading," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 454-467.
- William Lin, Hsiou-Wei & Ke, Wen-Chyan, 2011. "A computing bias in estimating the probability of informed trading," Journal of Financial Markets, Elsevier, vol. 14(4), pages 625-640, November.
- Sugato Chakravarty & Craig Holden, 2002.
"An Integrated Model of Market and Limit Orders,"
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