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Avalanche Dynamics And Trading Friction Effects On Stock Market Returns

Author

Listed:
  • GIULIA IORI

    (Department of Accounting, Finance and Management, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK)

Abstract

We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. A generalized version of the Random Field Ising Model (RFIM) is introduced to describe trading behavior. Imitation effects, which induce agents to trade, can generate avalanches in trading volume and large gaps in demand and supply. A trade friction is introduced which, by responding to price movements, creates a feedback mechanism on future trading and generates volatility clustering.

Suggested Citation

  • Giulia Iori, 1999. "Avalanche Dynamics And Trading Friction Effects On Stock Market Returns," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 10(06), pages 1149-1162.
    • Handle: RePEc:wsi:ijmpcx:v:10:y:1999:i:06:n:s0129183199000930
    DOI: 10.1142/S0129183199000930
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    Citations

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    Cited by:

    1. Iori, Giulia, 2002. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 269-285, October.
    2. Gao-Feng Gu & Xiong Xiong & Hai-Chuan Xu & Wei Zhang & Yongjie Zhang & Wei Chen & Wei-Xing Zhou, 2021. "An empirical behavioral order-driven model with price limit rules," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-24, December.
    3. Kaizoji, Taisei & Bornholdt, Stefan & Fujiwara, Yoshi, 2002. "Dynamics of price and trading volume in a spin model of stock markets with heterogeneous agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 316(1), pages 441-452.
    4. Chen, Shu-Heng & Chang, Chia-Ling & Wen, Ming-Chang, 2014. "Social networks and macroeconomic stability," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-40.
    5. Wyart, Matthieu & Bouchaud, Jean-Philippe, 2007. "Self-referential behaviour, overreaction and conventions in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 63(1), pages 1-24, May.
    6. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2007. "Agent-based Models of Financial Markets," Papers physics/0701140, arXiv.org.
    7. Sornette, D., 2002. "“Slimming” of power-law tails by increasing market returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 309(3), pages 403-418.
    8. Damien Challet, 2016. "Regrets, learning and wisdom," Post-Print hal-01312973, HAL.
    9. Taisei Kaizoji, 2013. "Modeling of Stock Returns and Trading Volume," Papers 1309.2416, arXiv.org.
    10. Meudt, Frederik & Schmitt, Thilo A. & Schäfer, Rudi & Guhr, Thomas, 2016. "Equilibrium pricing in an order book environment: Case study for a spin model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 453(C), pages 228-235.
    11. Yang, Chunxia & Zhu, Xueshuai & Li, Qian & Chen, Yanhua & Deng, Qiangqiang, 2014. "Research on the evolution of stock correlation based on maximal spanning trees," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 1-18.
    12. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2001. "Microscopic Models of Financial Markets," Papers cond-mat/0110354, arXiv.org.
    13. Shu-Heng Chen & Sai-Ping Li, 2011. "Econophysics: Bridges over a Turbulent Current," Papers 1107.5373, arXiv.org.
    14. Gu, Gao-Feng & Chen, Wei & Zhou, Wei-Xing, 2008. "Empirical regularities of order placement in the Chinese stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(13), pages 3173-3182.
    15. Taisei Kaizoji, 2013. "Modelling of Stock Returns and Trading Volume," IIM Kozhikode Society & Management Review, , vol. 2(2), pages 147-155, July.
    16. Blaurock, Ivonne & Schmitt, Noemi & Westerhoff, Frank, 2018. "Market entry waves and volatility outbursts in stock markets," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 19-37.
    17. Frederik Meudt & Thilo A. Schmitt & Rudi Schafer & Thomas Guhr, 2015. "Equilibrium Pricing in an Order Book Environment: Case Study for a Spin Model," Papers 1502.01125, arXiv.org.
    18. Chen, Shu-Heng & Chang, Chia-Ling & Tseng, Yi-Heng, 2014. "Social networks, social interaction and macroeconomic dynamics: How much could Ernst Ising help DSGE?," Research in International Business and Finance, Elsevier, vol. 30(C), pages 312-335.
    19. Tetsuya Takaishi, 2014. "Analysis of Spin Financial Market by GARCH Model," Papers 1409.0118, arXiv.org.
    20. C. Gonçalves P., 2015. "Financial Market Modeling With Quantum Neural Networks," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 3(4), pages 44-63.
    21. Nian, Fuzhong & Liu, Xinghao & Diao, Hongyuan, 2022. "Mechanism of investor behavior propagation in stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 608(P1).

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