Analysis of a decision model in the context of equilibrium pricing and order book pricing

Daniel C. Wagner, Thilo A. Schmitt, Rudi Sch\"afer, Thomas Guhr and Dietrich E. Wolf

Papers from arXiv.org

Abstract: An agent-based model for financial markets has to incorporate two aspects: decision making and price formation. We introduce a simple decision model and consider its implications in two different pricing schemes. First, we study its parameter dependence within a supply-demand balance setting. We find realistic behavior in a wide parameter range. Second, we embed our decision model in an order book setting. Here we observe interesting features which are not present in the equilibrium pricing scheme. In particular, we find a nontrivial behavior of the order book volumes which reminds of a trend switching phenomenon. Thus, the decision making model alone does not realistically represent the trading and the stylized facts. The order book mechanism is crucial.

Date: 2014-04
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