Rock around the clock:An agent-based model of low-and high frequency trading

Sandrine Jacob Leal (), Mauro Napoletano, Andrea Roventini and Giorgio Fagiolo ()
Additional contact information
Sandrine Jacob Leal: Cerefige, ICN, Business School,Gredec, Postal: 13,rue Michel Ney 54000 Nancy

No 2014-03, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: We build an agent-based model to study how the interplay between low- and high- frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading exacerbates market volatility and generates ash crashes. In the model, low-frequency agents adopt trading rules based on chrono- logical time and can switch between fundamentalist and chartist strategies. On the contrary, high-frequency traders activation is event-driven and depends on price fluctuations. High-frequency traders use directional strategies to exploit market in- formation produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore,we find that the presence of high-frequency trading increases market volatility and plays a fundamental role in the generation of ash crashes.The emergence of ash crashes is explained by two salient characteristics of high-frequency traders, i.e. their ability to i) generate high bid-ask spreads and ii) synchronize on the sell side of the limit order book. Finally, we find that higher rates of order cancellation by high-frequency traders increase the incidence of ash crashes but reduce their duration.

Keywords: Agent based models; Limit order book; High frequency trading; low frequency trading; flash crashes; market volatility (search for similar items in EconPapers)
JEL-codes: C63 G01 G12 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-cmp, nep-mst and nep-ore
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Citations: View citations in EconPapers (18)

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http://www.ofce.sciences-po.fr/pdf/dtravail/WP2014-03.pdf (application/pdf)

Related works:
Journal Article: Rock around the clock: An agent-based model of low- and high-frequency trading (2016)
Working Paper: Rock around the Clock: An agent-based model of low- and high-frequency trading (2016)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2015)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2015)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
Working Paper: Rock around the clock: An agent-based model of low- and high-frequency trading (2014)
Working Paper: Rock around the clock: an agent-based model of low- and high-frequency trading (2014)
Working Paper: Rock around the clock: an agent-based model of low- and high-frequency trading (2014)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:1403

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