Queuing, social interactions, and the microstructure of financial markets

Authored by Unknown

Date Published: 2008-04

DOI: 10.1017/s1365100507070010

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

We consider an agent-based model of financial markets with asynchronous order arrival in continuous time. Buying and selling orders arrive in accordance with a Poisson dynamics where the order rates depend both on past prices and on the mood of the market. The agents form their demand for an asset on the basis of their forecasts of future prices and their forecasting rules may change over time as a result of the influence of other traders. Among the possible rules are “chartist” or extrapolatory rules. We prove that when chartists are in the market, and with choice of scaling, the dynamics of asset prices can be approximated by an ordinary delay differential equation. The fluctuations around the first-order approximation follow an Omstein-Uhlenbeck dynamics with delay in a random environment of investor sentiment.

Tags

Social interaction microstructure of financial markets queuing networks