Trade Clustering and Power Laws in Financial Markets (Published in Theoretical Economics, 15:1365?1398, 2020)

Makoto Nirei, John Stachurski and Tsutomu Watanabe
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John Stachurski: Australian National University
Tsutomu Watanabe: University of Tokyo

No CARF-F-450, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This study provides an explanation of the emergence of power laws in trading volume and asset returns. In the model, traders infer other traders' private signals regarding the value of an asset from their actions and adjust their own behavior accordingly. When the number of traders is large and the signals for asset value are noisy, this leads to power laws for equilibrium volume and returns. We also provide numerical results showing that the model reproduces observed distributions of daily stock volume and returns.

Pages: 57
Date: 2018-11
New Economics Papers: this item is included in nep-mst
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