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Time-dependent trading strategies in a continuous double auction

Author

Listed:
  • Shira Fano

    (Department of Economics, University Of Venice C� Foscari)

  • Paolo Pellizzari

    (Department of Economics, University Of Venice C� Foscari)

Abstract

We model a continuous double auction with heterogenous agents and compute approximate optimal trading strategies using evolution strategies. Agents privately know their values and costs and have a limited time to transact. We focus on equilibrium strategies that are developed taking into account the number of traders that submitted orders previously, as well as the number of who will submit subsequently. We find that it is optimal to place increasingly aggressive orders, according to a roughly linear schedule, and test the resulting equilibrium for robustness and accuracy.

Suggested Citation

  • Shira Fano & Paolo Pellizzari, 2011. "Time-dependent trading strategies in a continuous double auction," Working Papers 2011_03, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2011_03
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    References listed on IDEAS

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    1. Thierry Foucault & Ohad Kadan & Eugene Kandel, 2005. "Limit Order Book as a Market for Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1171-1217.
    2. Foucault, Thierry, 1999. "Order flow composition and trading costs in a dynamic limit order market1," Journal of Financial Markets, Elsevier, vol. 2(2), pages 99-134, May.
    3. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    4. Dawid, Herbert, 1999. "On the convergence of genetic learning in a double auction market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1545-1567, September.
    5. Ioanid Rosu, 2009. "A Dynamic Model of the Limit Order Book," Post-Print hal-00515873, HAL.
    6. Shira Fano & Marco LiCalzi & Paolo Pellizzari, 2013. "Convergence of outcomes and evolution of strategic behavior in double auctions," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 513-538, July.
    7. Rust, John & Miller, John H. & Palmer, Richard, 1994. "Characterizing effective trading strategies : Insights from a computerized double auction tournament," Journal of Economic Dynamics and Control, Elsevier, vol. 18(1), pages 61-96, January.
    8. Ioanid Rosu, 2009. "A Dynamic Model of the Limit Order Book," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4601-4641, November.
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    Cited by:

    1. Hugues Bersini, 2012. "UML for ABM," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 15(1), pages 1-9.

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    More about this item

    Keywords

    Continuous double auction; equilibrium trading strategies; evolution strategies.;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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