AVALANCHE DYNAMICS AND TRADING FRICTION EFFECTS ON STOCK MARKET RETURNS
- 1 September 1999
- journal article
- research article
- Published by World Scientific Pub Co Pte Ltd in International Journal of Modern Physics C
- Vol. 10 (06) , 1149-1162
- https://doi.org/10.1142/s0129183199000930
Abstract
We propose a model with heterogeneous interacting traders which can explain some of the stylized facts of stock market returns. A generalized version of the Random Field Ising Model (RFIM) is introduced to describe trading behavior. Imitation effects, which induce agents to trade, can generate avalanches in trading volume and large gaps in demand and supply. A trade friction is introduced which, by responding to price movements, creates a feedback mechanism on future trading and generates volatility clustering.Keywords
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