Exploring Price Fluctuations in a Double Auction Market

Mingjie Ji and Honggang Li ()
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Mingjie Ji: Beijing Normal University
Honggang Li: Beijing Normal University

Computational Economics, 2016, vol. 48, issue 2, No 1, 189-209

Abstract: Abstract Inspired by the analysis of the limit order book and order flows in the order-driven model of Chiarella et al. this paper conducts a dynamic analysis of a microstructure model and discusses the origin of price fluctuations. Agents are assumed to use either a fully fundamental-value reversion or a trend following strategy to form their expectation of future asset returns. Furthermore, the probability of changing strategies and the parameters for the strategy are chosen based on a fitness measure. In this way, the agents’ strategy choices are better related to the evolution of the market. We also add a layer of intraday activity. This model can obtain the results of the original model, such as the impacts of the traders’ strategy and the stylized facts. Furthermore, we exhibit many empirically observed features in both the intraday and the daily horizon. The results provide evidence that the agents’ expectations and trading volume can generate large daily price changes and that intraday price fluctuations can be caused by large trading size or liquidity fluctuations in different conditions.

Keywords: Continuous double auctions; Market microstructure; Heterogeneous agents; Price fluctuations (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10614-015-9520-9

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