Time-Varying Arbitrage and Dynamic Price Discovery

43 Pages Posted: 24 Jul 2016 Last revised: 19 Dec 2016

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: November 22, 2016

Abstract

In this paper we combine the heterogeneous agent literature with the market microstructure literature in order to introduce time varying measures of price discovery based on underlying profit maximizing behavior. We set up a heterogeneous agent model with arbitrageurs and chartists, and allow agents to switch between the strategies conditional on recent performance. Estimation of the model on Canadian-US cross-listed stocks shows that there is significant heterogeneity and switching, causing ample variation in the information processing capacity of markets.

Keywords: Time-Varying Arbitrage; Price discovery; Heterogeneous Agent Models

JEL Classification: C32, C5, G15

Suggested Citation

Frijns, Bart and Zwinkels, Remco C.J., Time-Varying Arbitrage and Dynamic Price Discovery (November 22, 2016). Available at SSRN: https://ssrn.com/abstract=2813124 or http://dx.doi.org/10.2139/ssrn.2813124

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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