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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

Abstract: 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)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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Handle: RePEc:eee:dyncon:v:91:y:2018:i:c:p:485-502