Analysis of a decision model in the context of equilibrium pricing and order book pricing

TL;DR

This paper introduces a simple agent-based decision model for financial markets and explores its behavior in equilibrium and order book pricing schemes, highlighting the importance of order book mechanisms for realistic trading features.

Contribution

It presents a new decision model and demonstrates its implications in both equilibrium and order book pricing contexts, emphasizing the significance of order book dynamics.

Findings

Realistic behavior across a wide parameter range in equilibrium pricing

Order book setting reveals nontrivial volume behaviors

Order book mechanisms are essential for realistic market modeling

Abstract

An agent-based model for financial markets has to incorporate two aspects: decision making and price formation. We introduce a simple decision model and consider its implications in two different pricing schemes. First, we study its parameter dependence within a supply-demand balance setting. We find realistic behavior in a wide parameter range. Second, we embed our decision model in an order book setting. Here we observe interesting features which are not present in the equilibrium pricing scheme. In particular, we find a nontrivial behavior of the order book volumes which reminds of a trend switching phenomenon. Thus, the decision making model alone does not realistically represent the trading and the stylized facts. The order book mechanism is crucial.