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

Sandrine Jacob Leal, Mauro Napoletano (), Andrea Roventini and Giorgio Fagiolo ()
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Sandrine Jacob Leal: Groupe de Recherche en Droit, Economie et Gestion

No 2014-03, Sciences Po publications from Sciences Po

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 flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. On the contrary, high-frequency traders activation is event-driven and depends on price the contrary, high-frequency traders activation is event-driven and depends on price formation produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we found that the presence of high-frequency trading increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash 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 found that higher rates of order cancellation by high-frequency traders increase the incidence of flash 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: G12 C63 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9) Track citations by RSS feed

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Related works:
Journal Article: Rock around the clock: An agent-based model of low- and high-frequency trading (2016) Downloads
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 (2014) Downloads
Working Paper: Rock around the clock:An agent-based model of low-and high frequency trading (2014) Downloads
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014) Downloads
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) Downloads
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014) Downloads
Working Paper: Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading (2014) Downloads
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