Fundamentalists clashing over the book: a study of order-driven stock markets

Abstract

Agent-based models of market dynamics must strike a compromise between the structural assumptions that represent the trading mechanism and the behavioural assumptions that describe the rules by which traders make their decisions. We present a structurally detailed model of an order-driven stock market and show that a minimal set of behavioural assumptions suffices to generate a leptokurtic distribution of short-term log-returns. This result supports the conjecture that the emergence of some statistical properties of financial time series is due to the microstructure of stock markets.

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

“…The first finding confirms the robustness of a result already exhibited in Ref. [1]. The other four concern the comparative statics of a few summary statistics with respect to the bid-ask spread demanded by the agents, which we proxy by P and D. In particular, we assess the downside risk using two customary measures such as the Value At Risk (VaR) and the Expected Shortfall (ES) for the seriesr t of the simulated returns.…”

“…[1], with special emphasis on the conjoint effect of the risk premia and of the efficacy-immediacy tradeoff on the general properties of the time series of the returns. We show that even die-hard fundamentalist trading can generate fat-tailed and leptokurtic returns when it takes place in an order-driven market.…”

“…In this respect, the analysis reported below can be interpreted as a test of robustness which shows that the conclusions in Ref. [1] hold in a variety of situations and are not an artifact of specific parametric values. Alternatively, the agents trading in our simulations can be thought as belonging to different two-parameter breeds of the same behavioral family BðP; DÞ.…”

“…This paper builds on [1], where it is shown that the interaction of purely fundamentalist agents with heterogeneous estimates in a order-driven market is sufficient to generate fat tails and a leptokurtic shape of the return distribution. We confirm the robustness of this conclusion under an alternative formulation and across a wide range of parameter values.…”

“…Section 2 describes the agents and the market model in a compact way; see [1] for additional details. Section 3 presents our simulations and discuss the results.…”