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Market depth and price dynamics: A note

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  • Frank Westerhoff

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.

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  • Frank Westerhoff, 2004. "Market depth and price dynamics: A note," Papers cond-mat/0403723, arXiv.org.
  • Handle: RePEc:arx:papers:cond-mat/0403723
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    1. G. Ehrenstein & F. Westerhoff & D. Stauffer, 2005. "Tobin tax and market depth," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 213-218.
    2. 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.
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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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