A microsimulation of traders activity in the stock market: the role of heterogeneity, agents’ interactions and trade frictions

We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. In the model, synchronization effects, which generate large fluctuations in returns, can arise purely from communication and imitation among traders. The key element in the...

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Bibliographic Details
Published in:Journal of economic behavior & organization 2002-10, Vol.49 (2), p.269-285
Main Author: Iori, Giulia
Format: Article
Language:English
Subjects:
Capital market
Economic models
Economic theory
Economics
Fat tails
Financial economics
Herd behavior
Herding
Organization theory
Securities markets
Stock exchange
Stock prices
Stock returns
Studies
Trade
Trading volume
Volatility
Volatility clustering
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Summary:We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. In the model, synchronization effects, which generate large fluctuations in returns, can arise purely from communication and imitation among traders. The key element in the model is the introduction of a trade friction which, by responding to price movements, creates a feedback mechanism on future trading and generates volatility clustering. The model also reproduces the empirically observed positive cross-correlation between volatility and trading volume.
ISSN:0167-2681
1879-1751
DOI:10.1016/S0167-2681(01)00164-0