The role of communication and imitation in limit order markets

Topical issue on The Physics Approach to Risk: Agent-Based Models and Networks

Abstract

In this paper we develop an order driver market model with heterogeneous traders that imitate each other on different network structures. We assess how imitations among otherway noise traders, can give rise to well known stylized facts such as fat tails and volatility clustering. We examine the impact of communication and imitation on the statistical properties of prices and order flows when changing the networks’ structure, and show that the imitation of a given, fixed agent, called “guru", can generate clustering of volatility in the model. We also find a positive correlation between volatility and bid-ask spread, and between fat-tailed fluctuations in asset prices and gap sizes in the order book.

PACS

02.50.-r Probability theory, stochastic processes, and statistics 05.40.-a Fluctuation phenomena, random processes, noise, and Brownian motion 89.65.Gh Economics; econophysics, financial markets, business and management 89.65.-s Social and economic systems 

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Copyright information

© EDP Sciences, SIF, Springer-Verlag Berlin Heidelberg 2009

Authors and Affiliations

  1. 1.Department of EconomicsUniversità Politecnica delle MarcheAnconaItaly
  2. 2.Department of EconomicsCity University LondonLondonUK

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