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Modeling and simulation of a double auction artificial financial market

Marco Raberto () and Silvano Cincotti ()

Physica A: Statistical Mechanics and its Applications, 2005, vol. 355, issue 1, 34-45

Abstract: We present a double-auction artificial financial market populated by heterogeneous agents who trade one risky asset in exchange for cash. Agents issue random orders subject to budget constraints. The limit prices of orders may depend on past market volatility. Limit orders are stored in the book whereas market orders give immediate birth to transactions. We show that fat tails and volatility clustering are recovered by means of very simple assumptions. We also investigate two important stylized facts of the limit order book, i.e., the distribution of waiting times between two consecutive transactions and the instantaneous price impact function. We show both theoretically and through simulations that if the order waiting times are exponentially distributed, even trading waiting times are also exponentially distributed.

Keywords: Agent-based simulation; Artificial financial market; Double auction; Limit order book (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1016/j.physa.2005.02.061

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Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:34-45