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Market Depth And Price Dynamics: A Note

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  • FRANK H. WESTERHOFF

    (Department of Economics, University of Osnabrueck, Rolandstrasse 8, D-49069 Osnabrueck, Germany)

Abstract

This note explores the consequences of nonlinear price impact functions on price dynamics within the chartist–fundamentalist framework. Price impact functions may be nonlinear with respect to trading volume. As indicated by recent empirical studies, a given transaction may cause a large (small) price change if market depth is low (high). Simulations reveal that such a relationship may create endogenous complex price fluctuations even if the trading behavior of chartists and fundamentalists is linear.

Suggested Citation

  • Frank H. Westerhoff, 2004. "Market Depth And Price Dynamics: A Note," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 15(07), pages 1005-1012.
    • Handle: RePEc:wsi:ijmpcx:v:15:y:2004:i:07:n:s0129183104006455
    DOI: 10.1142/S0129183104006455
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    References listed on IDEAS

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    1. 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.
    2. G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005. "Tobin tax and market depth," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 213-218.
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    Cited by:

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    4. Xiaoping Li & Chunyang Zhou, 2024. "Tobin Tax, Carry Trade, and the Exchange Rate Dynamics," Computational Economics, Springer;Society for Computational Economics, vol. 63(4), pages 1627-1647, April.

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