Fat tails and multi-scaling in a simple model of limit order markets |
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| Institution: | 1. Kimia Lab, University of Waterloo, Waterloo, ON, Canada;2. Vector Institute, MaRS Centre, Toronto, ON, Canada;1. School of Management, University of Bath, Claverton Down, Bath BA2 7AY, UK;2. Southampton Business School, Centre for Operational Research, Management Science and Information Systems (CORMSIS), University of Southampton, Southampton SO17 1BJ, UK;3. Département Management et Technologie, École des Sciences de la Gestion, Interuniversity Research Centre on Enterprise Networks, Logistics and Transportation (CIRRELT), Université du Québec à Montréal, C.P. 8888, succ. Centre-ville, Montréal, QC H3C 3P8, Canada;4. Mathematical Sciences, CORMSIS, University of Southampton, Southampton SO17 1BJ, UK |
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| Abstract: | We use a simple model where traders submit limit orders which are cleared in a double auction market. The limit prices are set by traders randomly, for buyers around a long-term trend and for sellers in a narrow band around their purchase price. Orders which are not filled within a specific time frame are randomly assigned a new limit price. In this framework we find evidence for the endogenous emergence of fat tails in the distribution of returns and multi-scaling whose origin is attributed to the market structure. |
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