Abstract
We built an artificial market model and compared effects of price variation limits, short selling regulations and up-tick rules. In the case without the regulations, the price fell to below a fundamental value when an economic crush occurred. On the other hand, in the case with the regulations, this overshooting did not occur. However, the short selling regulation and the up-tick rule caused the trading prices to be higher than the fundamental value. We also surveyed an adequate limitation price range and an adequate limitation time span for the price variation limit and found a parameters’ condition of the price variation limit to prevent the over-shorts. We also showed the limitation price range should be bigger than a volatility calculated by the limitation time span.
Highlights
Financial exchanges sometimes employ a “price variation limit”, which restrict trades out of certain price ranges within certain time spans to avoid sudden large price fluctuations
The short selling regulation and the up-tick rule caused the trading prices to be higher than the fundamental value
We showed the limitation price range should be bigger than a volatility calculated by the limitation time span
Summary
Financial exchanges sometimes employ a “price variation limit”, which restrict trades out of certain price ranges within certain time spans to avoid sudden large price fluctuations. Zuta et al discussed effectiveness of price variation limits and argued that an artificial market model testing such regulations should be implementing a learning process to replicate bubbles, and showed that a hazard rate enables verification of whether the models can replicate a bubble process or not [10]. No simulation studies have investigated up-tick rules, and compared effects of the short selling regulation, the up-tick rule and the price variation limit using an artificial market model. We built an artificial market model and compared effects of price variation limits, short selling regulations and up-tick rules.
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