Chasing trends at the micro-level: The effect of technical trading on order book dynamics
Carl Chiarella and
Daniel Ladley ()
Journal of Banking & Finance, 2016, vol. 72, issue S, S119-S131
Abstract:
Technical traders attempt to exploit trends in market prices and the order flow. Despite this little is known about how these traders behave in a micro-structure context. We consider a model of an order book based financial market. The market contains two groups: informed traders and technical traders. A numerical technique is used to identify a Markov perfect equilibrium of the trading game and so determine the optimal strategies. We find that technical trading rules are profitable and allow traders to increase their returns. The effect of technical traders on the market, however, is ambiguous. They decrease volatility and pricing errors but also increase trading costs despite primarily acting as liquidity suppliers.
Keywords: Market micro-structure; Technical trading; Order book; Market efficiency; Dynamic equilibrium (search for similar items in EconPapers)
JEL-codes: C63 G10 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378426615003544
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:72:y:2016:i:s:p:s119-s131
DOI: 10.1016/j.jbankfin.2015.11.019
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().