Survey_Gsell_2008

Abstract

The model used to generate the underlying order flow for this research is based on the one developed by Chiarella & Iori (2002, 2004). However, adaptations have been made to the model. There are two distinct types of traders within the simulation: stylized traders and algorithmic trading traders. Their orders are matched according to the rules and procedures of the continuous double auction. Stylized traders are simulated by software agents, each representing a special combination of characteristics of stylized trader types, i.e. informed trader, momentum trader and noise trader as described in standard market microstructure theory (Madhavan 2000, Schwartz & Francioni 2004). Unlike many other simulation models, here stylized agent types are not implemented separately.Instead each agent is at least to some extent behaving like an informed, a momentum and a noise trader. These risk-averse agents are supposed to know the fundamental value f p of the tradable asset as well as the history of prices. The stylized trader agents determine their demand based on this information, using a weighted behavior model. Variety among agents is ensured as each agent incorporates a unique weighting of these stylized behavioral patterns.