A simulation analysis of the microstructure of an order driven financial market with multiple securities and portfolio choices

Author： Consiglio Andrea Lacagnina Valerio Russino Annalisa

Publisher： Routledge Ltd

ISSN： 1469-7688

Source： Quantitative Finance, Vol.5, Iss.1, 2005-02, pp. : 71-87

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Abstract

In this paper we propose an artificial market where multiple risky assets are exchanged. Agents are constrained by the availability of resources and trade to adjust their portfolio according to an exogenously given target portfolio. We model the trading mechanism as a continuous auction order-driven market . Agents are heterogeneous in terms of desired target portfolio allocations, but they are homogeneous in terms of trading strategies. We investigate the role played by the trading mechanism in affecting the dynamics of prices, trading volume and volatility. We show that the institutional setting of a double auction market is sufficient to generate a non-normal distribution of price changes and temporal patterns that resemble those observed in real markets. Moreover, we highlight the role played by the interaction between individual wealth constraints and the market frictions associated with a double auction system to determine the negative asymmetry of the stock returns distribution.