An agent-based model of financial returns in a limit order market

Koichi Hamada, Kouji Sasaki and Toshiaki Watanabe
Additional contact information
Koichi Hamada: Yale University
Kouji Sasaki: Bank of Japan
Toshiaki Watanabe: Tokyo Metropolitan University

A chapter in Practical Fruits of Econophysics, 2006, pp 158-162 from Springer

Abstract: Summary A set of finance literature shows that asset return processes are characterized by a GARCH class conditional volatility and fat-tail distributed disturbances, such as mixture of normal distributions and t-distribution (Watanabe 2000; Watanabe and Asai 2004). This paper finds that this type of complicated process arises by aggregating returns of a risky asset traded in a limit order market. The conditional volatility of generated return series can be modeled as a GARCH class since the volatility gradually diminishes as the price assimilates the new information about the future asset return. The reason why the error term of estimated model is fat-tail distributed is that the return of transaction prices is distributed as a mixture of normals; one of the two distributions represents the drift of the price process, and the other represents the liquidity effect.

Keywords: Agent model; Liquidity; Limit order market (search for similar items in EconPapers)
Date: 2006
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

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:spr:sprchp:978-4-431-28915-9_28

Ordering information: This item can be ordered from
http://www.springer.com/9784431289159

DOI: 10.1007/4-431-28915-1_28

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().