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Rock around the clock: an agent-based model of low- and high-frequency trading

 

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Type:   Working paper
 
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)
 
Date de publication:   2014-02
 
Éditeur:   Paris  :  OFCE
 
Collection:   Working paper de l'OFCE  :  2014-03
 
Mots-clés:   [fr] Agent-based models, Limit order book, High-frequency trading, low-frequency trading, Flash crashes, Market volatility
 
JEL:   G12,  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. On the contrary, high-frequency traders activation is event-driven and depends on price the contrary, high-frequency traders activation is event-driven and depends on price formation produced by low-frequency traders. Monte-Carlo simulations reveal that the model replicates the main stylized facts of financial markets. Furthermore, we found that the presence of high-frequency trading 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 found that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.
 
URL:   http://www.ofce.sciences-po.fr/publications/document.php
 
 

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Version de l'éditeur wp2014-03.pdf 0,88 MB