Equilibrium pricing in an order book environment: Case study for a spin model
Authored by Rudi Schaefer, Thomas Guhr, Frederik Meudt, Thilo A Schmitt
Date Published: 2016
DOI: 10.1016/j.physa.2016.01.073
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Abstract
When modeling stock market dynamics, the price formation is often based
on an equilibrium mechanism. In real stock exchanges, however, the price
formation is governed by the order book. It is thus interesting to check
if the resulting stylized facts of a model with equilibrium pricing
change, remain the same or, more generally, are compatible with the
order book environment. We tackle this issue in the framework of a case
study by embedding the Bornholdt-Kaizoji-Fujiwara spin model into the
order book dynamics. To this end, we use a recently developed agent
based model that realistically incorporates the order book. We find
realistic stylized facts. We conclude for the studied case that
equilibrium pricing is not needed and that the corresponding assumption
of a ``fundamental{''} price may be abandoned. (C) 2016 Elsevier B.V.
All rights reserved.
Tags
Dynamics
bubbles
Stock markets
Volatility
Financial-markets
Returns
Crashes