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A simulation analysis of the microstructure of double auction markets

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  • Carl Chiarella
  • Giulia Iori

Abstract

We introduce an order-driven market model with heterogeneous agents trading via a central order matching mechanism. Traders set bids and asks and post market or limit orders according to exogenously fixed rules. We investigate how different trading strategies may affect the dynamics of price, bid-ask spreads, trading volume and volatility. We also analyse how some features of market design, such as tick size and order lifetime, affect market liquidity. The model is able to reproduce many of the complex phenomena observed in real stock markets.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:quantf:v:2:y:2002:i:5:p:346-353
    DOI: 10.1088/1469-7688/2/5/303
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    References listed on IDEAS

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    1. C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
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    6. Seppi, Duane J, 1997. "Liquidity Provision with Limit Orders and a Strategic Specialist," The Review of Financial Studies, Society for Financial Studies, vol. 10(1), pages 103-150.
    7. Martens, Martin, 1998. "Price discovery in high and low volatility periods: open outcry versus electronic trading," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(3-4), pages 243-260, December.
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