Order Book, Financial Markets and Self-Organized Criticality

TL;DR

This paper introduces a simple order book model for artificial financial markets exhibiting self-organized criticality, highlighting the impact of imitation and the potential stabilizing role of random traders.

Contribution

It presents a novel minimalistic order book model that reproduces critical market behaviors and explores the influence of imitation and random traders on market stability.

Findings

Model reproduces fat tails and critical dynamics of real markets

Imitation influences trading decisions and market behavior

Random traders can reduce market fluctuations

Abstract

We present a simple order book mechanism that regulates an artificial financial market with self-organized criticality dynamics and fat tails of returns distribution. The model shows the role played by individual imitation in determining trading decisions, while fruitfully replicates typical aggregate market behavior as the "self-fulfilling prophecy". We also address the role of random traders as a possible decentralized solution to dampen market fluctuations.