A Simulation Analysis of the Microstructure of an Order Driven Financial Market with Multiple Securities and Portfolio Choices

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8 Citazioni (Scopus)

Abstract

In this paper we propose an artificial market where multiple risky assets are exchanged. Agentsare constrained by the availability of resources and trade to adjust their portfolio according toan exogenously given target portfolio. We model the trading mechanism as a continuousauction order-driven market. Agents are heterogeneous in terms of desired target portfolioallocations, but they are homogeneous in terms of trading strategies. We investigate therole played by the trading mechanism in affecting the dynamics of prices, trading volumeand volatility. We show that the institutional setting of a double auction market is sufficientto generate a non-normal distribution of price changes and temporal patterns thatresemble those observed in real markets. Moreover, we highlight the role played by theinteraction between individual wealth constraints and the market frictions associatedwith a double auction system to determine the negative asymmetry of the stock returnsdistribution.
Lingua originaleEnglish
pagine (da-a)71-87
RivistaQuantitative Finance
Volume5
Stato di pubblicazionePublished - 2005

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Portfolio choice
Double auction
Trading mechanism
Simulation analysis
Financial markets
Microstructure
Price changes
Assets
Trading strategies
Asymmetry
Auction market
Resources
Wealth
Order-driven markets
Market frictions

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics, Econometrics and Finance(all)

Cita questo

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AU - Consiglio, Andrea

AU - Russino, Annalisa

AU - Lacagnina, Valerio

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AB - In this paper we propose an artificial market where multiple risky assets are exchanged. Agentsare constrained by the availability of resources and trade to adjust their portfolio according toan exogenously given target portfolio. We model the trading mechanism as a continuousauction order-driven market. Agents are heterogeneous in terms of desired target portfolioallocations, but they are homogeneous in terms of trading strategies. We investigate therole played by the trading mechanism in affecting the dynamics of prices, trading volumeand volatility. We show that the institutional setting of a double auction market is sufficientto generate a non-normal distribution of price changes and temporal patterns thatresemble those observed in real markets. Moreover, we highlight the role played by theinteraction between individual wealth constraints and the market frictions associatedwith a double auction system to determine the negative asymmetry of the stock returnsdistribution.

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KW - double auction market

KW - heterogeneous agents

KW - trading mechanism

UR - http://hdl.handle.net/10447/33274

M3 - Article

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SP - 71

EP - 87

JO - Quantitative Finance

JF - Quantitative Finance

SN - 1469-7688

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