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Breeds of risk-adjusted fundamentalist strategies in an order- driven market

Author

Listed:
  • Marco LiCalzi

    (Dept. of Applied Mathematics - University Ca' Foscari Venice)

  • Paolo Pellizzari

    (Dept. of Applied Mathematics - University Ca' Foscari Venice)

Abstract

This paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value-based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid-ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts.

Suggested Citation

  • Marco LiCalzi & Paolo Pellizzari, 2005. "Breeds of risk-adjusted fundamentalist strategies in an order- driven market," Computational Economics 0506001, EconWPA.
  • Handle: RePEc:wpa:wuwpco:0506001
    Note: Type of Document - pdf; pages: 17
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    4. Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 251-256.
    5. Marco Licalzi & Paolo Pellizzari, 2003. "Fundamentalists clashing over the book: a study of order-driven stock markets," Quantitative Finance, Taylor & Francis Journals, vol. 3(6), pages 470-480.
    6. Bottazzi, Giulio & Dosi, Giovanni & Rebesco, Igor, 2005. "Institutional architectures and behavioral ecologies in the dynamics of financial markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 197-228, February.
    7. Iori, Giulia, 2002. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 269-285, October.
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    1. repec:spr:comaot:v:24:y:2018:i:3:d:10.1007_s10588-017-9258-0 is not listed on IDEAS

    More about this item

    Keywords

    price dynamics; statistical properties of returns; market microstructure; agent-based simulations;

    JEL classification:

    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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