Time-varying arbitrage and dynamic price discovery
Bart Frijns () and
Remco C.J. Zwinkels
Journal of Economic Dynamics and Control, 2018, vol. 91, issue C, 485-502
We introduce time-varying measures of price discovery based on underlying profit maximizing behavior by combining the heterogeneous agent modelling literature with the market microstructure literature. We set up a heterogeneous agent model with arbitrageurs and trend chasers (chartists), and allow agents to switch between the strategies conditional on recent forecasting performance. Estimation of the model on Canadian-US cross-listed stocks on high-frequency data shows that there is significant heterogeneity and switching, causing ample variation in the information processing capacity of markets.
Keywords: Market microstructure; Heterogeneous agent models; Time-varying arbitrage; Price discovery (search for similar items in EconPapers)
JEL-codes: C32 C5 G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:91:y:2018:i:c:p:485-502
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