Analysis of a decision model in the context of equilibrium pricing and order book pricing

Authored by D. C. Wagner, T. A. Schmitt, R. Schaefer, T. Guhr, D. E. Wolf

Date Published: 2014-12-01

DOI: 10.1016/j.physa.2014.08.013

Sponsors: No sponsors listed

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

An agent-based model for financial markets has to incorporate two aspects: decision making and price formation. We introduce a simple decision model and consider its implications in two different pricing schemes. First, we study its parameter dependence within a supply-demand balance setting. We find realistic behavior in a wide parameter range. Second, we embed our decision model in an order book setting. Here, we observe interesting features which are not present in the equilibrium pricing scheme. In particular, we find a nontrivial behavior of the order book volumes which reminds of a trend switching phenomenon. Thus, the decision making model alone does not realistically represent the trading and the stylized facts. The order book mechanism is crucial. (C) 2014 Elsevier B.V. All rights reserved.

Tags

Decision Making Agent-based modeling Herding behavior Order book