Understanding Financial Market States Using an Artificial Double Auction Market
Authored by Seunghwan Kim, Gabjin Oh, Kyubin Yim
Date Published: 2016
DOI: 10.1371/journal.pone.0152608
Sponsors:
Korean National Research Foundation (NRF)
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Model Documentation:
Other Narrative
Mathematical description
Model Code URLs:
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Abstract
The ultimate value of theories describing the fundamental mechanisms
behind asset prices in financial systems is reflected in the capacity of
such theories to understand these systems. Although the models that
explain the various states of financial markets offer substantial
evidence from the fields of finance, mathematics, and even physics, previous theories that attempt to address the complexities of financial
markets in full have been inadequate. We propose an artificial double
auction market as an agent-based model to study the origin of complex
states in financial markets by characterizing important parameters with
an investment strategy that can cover the dynamics of the financial
market. The investment strategies of chartist traders in response to new
market information should reduce market stability based on the price
fluctuations of risky assets. However, fundamentalist traders
strategically submit orders based on fundamental value and, thereby
stabilize the market. We construct a continuous double auction market
and find that the market is controlled by the proportion of chartists, P-c. We show that mimicking the real state of financial markets, which
emerges in real financial systems, is given within the range P-c = 0.40
to P-c = 0.85; however, we show that mimicking the efficient market
hypothesis state can be generated with values less than P-c = 0.40. In
particular, we observe that mimicking a market collapse state is created
with values greater than P-c = 0.85, at which point a liquidity shortage
occurs, and the phase transition behavior is described at P-c = 0.85.
Tags
Heterogeneity
information
price impact
bid-ask spread
Stock-market
Returns
Long-memory
Loss aversion
Order-driven market
Statistical
properties