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. © 2002 Elsevier Science B.V. All rights reserved.
A microsimulation of traders activity in the stock market: The role of heterogeneity, agents' interactions and trade frictions
Iori G.
2002-01-01
Abstract
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. © 2002 Elsevier Science B.V. All rights reserved.
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