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Breeds of risk-adjusted fundamentalist strategies in an order-driven market

Marco LiCalzi () and Paolo Pellizzari ()

Physica A: Statistical Mechanics and its Applications, 2006, vol. 359, issue C, 619-633

Abstract: This paper studies an order-driven stock market where agents have heterogeneous estimates of the fundamental value of the risky asset. The agents are budget-constrained and follow a value-based trading strategy which buys or sells depending on whether the price of the asset is below or above its risk-adjusted fundamental value. This environment generates returns that are remarkably leptokurtic and fat-tailed. By extending the study over a grid of different parameters for the fundamentalist trading strategy, we exhibit the existence of monotone relationships between the bid–ask spread demanded by the agents and several statistics of the returns. We conjecture that this effect, coupled with positive dependence of the risk premium on the volatility, generates positive feedbacks that might explain volatility bursts.

Keywords: Price dynamics; Statistical properties of returns; Market microstructure; Agent-based simulations (search for similar items in EconPapers)
Date: 2006
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