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

Arbeitspapier

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 chrono- logical time and can switch between fundamentalist and chartist strategies. On the contrary, high-frequency traders activation is event-driven and depends on price fluctuations. High-frequency traders use directional strategies to exploit market in- formation 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 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 find that higher rates of order cancellation by high-frequency traders increase the incidence of flash crashes but reduce their duration.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: LEM Working Paper Series ; No. 2014/03

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates ; Financial Crises ; Computational Techniques; Simulation Modeling
• Subject: Agent-based models ; Limit order book ; High-frequency trading ; Low-frequency trading ; Flash crashes ; Market volatility

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Leal, Sandrine Jacob ; Napoletano, Mauro ; Roventini, Andrea ; Fagiolo, Giorgio
• Event: Veröffentlichung
• (who): Scuola Superiore Sant'Anna, Laboratory of Economics and Management (LEM)
• (where): Pisa
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/119822
• Last update: 10.03.2025, 11:44 AM CET