Do Stylised Facts of Order Book Markets Need Strategic Behaviour?
27 Pages Posted: 2 Jul 2007
Date Written: June 12, 2007
This paper studies the role of strategy and the order book market mechanism in price dynamics and the order flow behaviour. To this end we analyse a zero-intelligence agent model of a dynamic limit order market. Stylised facts of limit order markets are shown to be influenced and, in some cases, governed by the market mechanism rather than strategic interaction. Positive correlation in order types, for instance, is the result of the market architecture, and price movements may be predicted in the short term from analysing the state of the order book. In contrast the absolute probabilities of order submission highlight the contribution of strategic behaviour.
Keywords: Order book markets, stylised facts, market mechanism, strategic behaviour, price dynamics, order flow behaviour, Limit order book, order behaviour
JEL Classification: G12, G14
Suggested Citation: Suggested Citation