In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. Agents are assumed to have three ...components of the expectation of future asset returns, namely fundamentalist, chartist and noise trader. Furthermore agents differ in the characteristics describing these components, such as time horizon, risk aversion and the weights given to the various components. The model developed here extends a great deal of earlier literature in that the order submissions of agents are determined by utility maximisation, rather than the mechanical unit order size that is commonly assumed. In this way the order flow is better related to the ongoing evolution of the market. For the given market structure we analyze the impact of the three components of the trading strategies on the statistical properties of prices and order flows and observe that it is the chartist strategy that is mainly responsible of the fat tails and clustering in the artificial price data generated by the model. The paper provides further evidence that large price changes are likely to be generated by the presence of large gaps in the book.
The book focuses on the dynamics of nonlinear oligopoly models. It discusses the classical Cournot model with a large variety of demand and cost functions that illustrate the many different types of ...possible best response functions and shows the existence of unique and multiple equilibria. Particular emphasis is placed on the influence of nonnegativity and capacity constraints. Dynamics are introduced under various assumptions for the adjustment process and the analysis of global dynamics is given through some specific examples. The book considers a range of oligopolies and gives conditions for the local asymptotic stability of their equilibria, the impact of constraints is also discussed. The book contains a number of technical appendices that summarize techniques of global dynamics not easily accessible elsewhere.
Building on The Dynamics of Keynesian Monetary Growth by Chiarella and Flaschel (2000), this 2005 book is a key contribution to business cycle theory, setting out a disequilibrium approach with ...gradual adjustments of the key macroeconomic variables. Its analytic study of a deterministic model of economic activity, inflation and income distribution integrates elements in the tradition of Keynes, Metzler and Goodwin (KMG). After a qualitative analysis of the basic feedback mechanisms, the authors calibrate the KMG model to the stylized facts of the business cycle in the U.S. economy, and then undertake a detailed numerical investigation of the local and global dynamics generated by the model. Finally, topical issues in monetary policy are studied in small macromodels as well as for the KMG model by incorporating an estimated Taylor-type interest rate reaction function. The stability features of this enhanced model are also compared to those of the original KMG model.
This paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy. The analysis is performed by ...representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system.
By introducing a genetic algorithm learning with a classifier system into a limit order market, this paper provides a unified framework of microstructure and agent-based models of limit order markets ...that allows traders to determine their order submission endogenously according to market conditions. It examines how traders process and learn from market information and how the learning affects limit order markets. It is found that, measured by the average usage of different group of market information, trading rules under the learning become stationary in the long run. Also informed traders pay more attention to the last transaction sign while uninformed traders pay more attention to technical rules. Learning of uninformed traders improves market information efficiency, but not necessarily when informed traders learn. Opposite to the learning of informed traders, learning makes uninformed traders submit less aggressive limit orders and more market orders. Furthermore private values can have significant impact in the short run, but not in the long run. One implication is that the probability of informed trading (PIN) is positively related to the volatility and the bid-ask spread.
This paper considers the problem of numerically evaluating barrier option prices when the dynamics of the underlying are driven by stochastic volatility following the square root process of Heston ...(1993) 7. We develop a method of lines approach to evaluate the price as well as the delta and gamma of the option. The method is able to efficiently handle both continuously monitored and discretely monitored barrier options and can also handle barrier options with early exercise features. In the latter case, we can calculate the early exercise boundary of an American barrier option in both the continuously and discretely monitored cases.
We introduce an order-driven market model with heterogeneous agents trading via a central order matching mechanism. Traders set bids and asks and post market or limit orders according to exogenously ...fixed rules. We investigate how different trading strategies may affect the dynamics of price, bid-ask spreads, trading volume and volatility. We also analyse how some features of market design, such as tick size and order lifetime, affect market liquidity. The model is able to reproduce many of the complex phenomena observed in real stock markets.
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Paper presented at Applications of Physics in Financial Analysis (APFA) 3, 5-7 December 2001, Museum of London, UK.
This paper develops a dynamic model of a financial market where heterogeneous agents invest among multiple risky assets and a risk-free asset, under a market maker scenario. Particular attention is ...paid to the case of two risky assets and two agent types, fundamentalists and trend chasers, whose beliefs on both first and second moments of the conditional distribution of returns are based on past observations. Conditions for the stability of the “fundamental” equilibrium are established and the effect of the correlation between the risky assets is examined. It turns out that investors’ anticipated correlation and dynamic portfolio diversification do not always have a stabilizing role, but rather may act as a source of complexity in the financial market.
This book represents an ongoing research agenda the aim of which is to contribute to the Keynesian paradigm in macroeconomics. It examines the Dynamic General Equilibrium (DGE) model, the assumption ...of intertemporal optimizing behavior of economic agents, competitive markets and price mediated market clearing through flexible wages and prices.
The macroeconomic development of most major industrial economies is characterised by boom-bust cycles. Normally such boom-bust cycles are driven by specific sectors of the economy. In the financial ...meltdown of the years 2007–9 it was the credit sector and the real-estate sector that were the main driving forces. This book takes on the challenge of interpreting and modelling this meltdown. In doing so it revives the traditional Keynesian approach to the financial-real economy interaction and the business cycle, extending it in several important ways. In particular, it adopts the Keynesian view of a hierarchy of markets and introduces a detailed financial sector into the traditional Keynesian framework. The approach of the book goes beyond the currently dominant paradigm based on the representative agent, market clearing and rational economic agents. Instead it proposes an economy populated with heterogeneous, rationally bounded agents attempting to cope with disequilibria in various markets.
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