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Exploring Price Fluctuations in a Double Auction Market

Author

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  • Mingjie Ji

    (Beijing Normal University)

  • Honggang Li

    (Beijing Normal University)

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.

Suggested Citation

  • Mingjie Ji & Honggang Li, 2016. "Exploring Price Fluctuations in a Double Auction Market," Computational Economics, Springer;Society for Computational Economics, vol. 48(2), pages 189-209, August.
    • Handle: RePEc:kap:compec:v:48:y:2016:i:2:d:10.1007_s10614-015-9520-9
    DOI: 10.1007/s10614-015-9520-9
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    References listed on IDEAS

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    1. Chiarella, Carl & Iori, Giulia, 2009. "The impact of heterogeneous trading rules on the limit order book and order flows," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 525-537.
    2. Mike, Szabolcs & Farmer, J. Doyne, 2008. "An empirical behavioral model of liquidity and volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 200-234, January.
    3. J. Doyne Farmer & Laszlo Gillemot & Fabrizio Lillo & Szabolcs Mike & Anindya Sen, 2004. "What really causes large price changes?," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 383-397.
    4. Laszlo Gillemot & J. Doyne Farmer & Fabrizio Lillo, 2006. "There's more to volatility than volume," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 371-384.
    5. Lo, Andrew W, 1991. "Long-Term Memory in Stock Market Prices," Econometrica, Econometric Society, vol. 59(5), pages 1279-1313, September.
    6. Carl Chiarella & Giulia Iori, 2002. "A simulation analysis of the microstructure of double auction markets," Quantitative Finance, Taylor & Francis Journals, vol. 2(5), pages 346-353.
    7. Raberto, Marco & Cincotti, Silvano & Focardi, Sergio M. & Marchesi, Michele, 2001. "Agent-based simulation of a financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 319-327.
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    9. Chiarella, Carl & He, Xue-Zhong & Pellizzari, Paolo, 2012. "A Dynamic Analysis Of The Microstructure Of Moving Average Rules In A Double Auction Market," Macroeconomic Dynamics, Cambridge University Press, vol. 16(4), pages 556-575, September.
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    Cited by:

    1. Javier Castro & Rosa Espínola & Inmaculada Gutiérrez & Daniel Gómez, 2023. "Auctions: A New Method for Selling Objects with Bimodal Density Functions," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1707-1743, April.

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