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UBC Theses and Dissertations

A study of financial markets with heterogeneous agents L'Espérance, Bruno

Abstract

In this thesis, we present a model of a financial market with many heterogeneous agents in a continuous double auction market organization. We introduce the different concepts related to continuous double auction and electronic limit order book. We then construct a financial market model with heterogeneous agents that are using this electronic order book to trade. At each time, the next agent to trade is chosen independently of others according to a Poisson process. Each agent will decide to buy or to sell the stock according to the recommendation of a financial expert. These recommendations represent the expert expected price of the stock for the next period. There are three types of financial experts: the noise traders, the fundamentalist traders and the chartist traders. The recommendations from the noise traders are random, the recommendations from the fundamentalists are based on some fundamental value of the stock price while the recommendations of the chartists are form using some extrapolatory or contrarian rules. The agents are choosing the financial expert by comparing each of them using a performance measure. In our case, they compare a discounted sum of past profits their recommendation would have generated. Once the financial expert is determined, the agent forms her excess demand and then executes her trade according to the sign of her excess demand. Finally, we present numerical results from the simulation of this model and compare them with previously found empirical results. Some interesting results include the relation between the volatility of the stock and the trading volume, the bid and ask spread and the stock returns, the analysis of the effects of the variation of some important parameters like the tick size, the market activity and the level of patience of the agents, the analysis of the effects of the chartist traders on the return and price distributions and the comparison of the tail of the return distribution with a power-law distribution. The most important result is the suggestion of the existence and uniqueness of a unique stationary distribution for the price process.

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