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A DYNAMIC ANALYSIS OF THE MICROSTRUCTURE OF MOVING AVERAGE RULES IN A DOUBLE AUCTION MARKET

Published online by Cambridge University Press:  18 April 2011

Carl Chiarella ,
Xue-Zhong He  and
Paolo Pellizzari
Carl Chiarella
Affiliation:
University of Technology, Sydney
Xue-Zhong He
Affiliation:
University of Technology, Sydney
Paolo Pellizzari*
Affiliation:
Ca' Foscari University
*
Address correspondence to: Paolo Pellizzari, Dipartimento di Matematica Applicata, S. Giobbe—Cannaregio 873, 30121 Venice, Italy; e-mail: paolop@unive.it.
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Abstract

Inspired by the theoretically oriented dynamic analysis of moving average rules in the model of Chiarella, He, and Hommes (CHH) [Journal of Economic Dynamics and Control 30 (2006), 1729—1753], this paper conducts a dynamic analysis of a more realistic microstructure model of continuous double auctions in which the probability of heterogeneous agents trading is determined by the rules of either fundamentalists mean-reverting to the fundamental or chartists choosing moving average rules based on their relative performance. With such a realistic market microstructure, the model is able not only to obtain the results of the CHH model but also to characterize most of the stylized facts including volatility clustering, insignificant autocorrelations (ACs) of returns, and significant slowly decaying ACs of the absolute returns. The results seem to suggest that a comprehensive explanation of several statistical properties of returns is possible in a framework where both behavioral traits and realistic microstructure have a role.

Keywords

Microstructure ModelContinuous Double AuctionsHeterogeneous AgentsStylized Facts
Type
Articles
Information
Macroeconomic Dynamics , Volume 16 , Issue 4 , September 2012 , pp. 556 - 575
Copyright
Copyright © Cambridge University Press 2011

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