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Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading



Type:   Article
Titre:   Rock around the Clock: An Agent-Based Model of Low- and High-Frequency Trading
Auteur(s):   Jacob Leal, Sandrine - Groupe de Recherche en Droit, Economie et Gestion (Auteur)
Napoletano, Mauro (1977-...) - Observatoire français des conjonctures économiques (Auteur)
Roventini, Andrea - Laboratory of Economics and Management (LEM) (Auteur)
Fagiolo, Giorgio - Laboratory of Economics and Management (LEM) (Auteur)
In:   Journal of Evolutionary Economics
Date de publication:   2015-08
Éditeur:   ALLEMAGNE  :  Springer
Volume:   26
Numéro:   1
Pages:   49-76  p.
ISSN:   09369937
DOI:   10.1007/s00191-015-0418-4
Mots-clés:   [en] Agent-based models, Limit order book, High-frequency trading, Low-frequency trading
JEL:   G12,  G1,  G14,  C63
Résumé:   [en] We build an agent-based model to study how the interplay between low- and high-frequency trading affects asset price dynamics. Our main goal is to investigate whether high-frequency trading exacerbates market volatility and generates flash crashes. In the model, low-frequency agents adopt trading rules based on chronological time and can switch between fundamentalist and chartist strategies. By contrast, high-frequency traders activation is event-driven and depends on price fluctuations. High-frequency traders use directional strategies to exploit market information produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we find that the presence of high-frequency traders increases market volatility and plays a fundamental role in the generation of flash crashes. The emergence of flash crashes is explained by two salient characteristics of high-frequency traders, i.e., their ability to i. generate high bid-ask spreads and ii. synchronize on the sell side of the limit order book. Finally, we find that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.

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