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A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions

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  • Giulia Iori

    (University of Essex)

Abstract

We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. In the model, synchronization effects, which generate large fluctuations in returns, can arise purely from communication and imitation among traders. The key element in the model is the introduction of a trade friction which, by responding to price movements, creates a feedback mechanism on future trading and generates volatility clustering. The model also reproduces the empirically observed positive cross- correlation between volatility and trading volume.

Suggested Citation

  • Giulia Iori, 2000. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Finance 0004007, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0004007
    Note: Type of Document - Tex; prepared on unix; to print on PostScript; pages: 28; figures: included
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    More about this item

    Keywords

    Volatility clustering; fat tails; trading volume; herd behaviour.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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