Do Trading Mechanisms Affect Stylized Facts in Financial Markets? An Agent-based Simulation

Abstract

In order to investigate whether the trading mechanisms affect some stylized facts, we built an agent-based financial market model in which agents fall into fundamentalists or random traders. This model allows the consistent treatment of agents' behavior under two different trading mechanisms, namely the simple rule mechanism and the continuous bidding mechanism. Simulation results show that under different trading mechanisms, even the traders' population and initialization parameters are same, the results are widely different. These results support the conjecture that the emergence of some stylized facts of financial time series is due to not only the trading strategies of agent, but also as a consequence of trading mechanisms themselves. The results highlight the importance of the trading mechanism in shaping the dynamics of the market.