Abstract
We investigate the stochastic behavior of the transaction price process formed by the information-based dealer model. We extend two-agent model of Nadi Serhan Ayd?n to multi-agent case to see the effect of the market size and noise correlations. Applying the Monte Carlo method, our numerical findings are summarized as 1) volatility of the transaction price depends on both of the noise correlation and the market size, 2) the price process has a long term memory and its Hurst extend depends on both of the noise correlation and the market size.
Highlights
Market participants hope to know the true value of financial assets based on their available information
We investigate the stochastic behavior of the transaction price process formed by the information-based dealer model
We considered the dealer model under information-based approach to investigate the stochastic behavior of the transaction price
Summary
Market participants hope to know the true value of financial assets based on their available information. Brody et al [5] proposed that the price determination process between two agents trading in the secondary market can be described by the information based approach. In this application, it is assumed that different agents have access to different information and each agent is unaware of each other’s theoretical prices. The agent can utilize her counterparty’s intermittent information garnered at every execution as well as her own continuously observed information in order to evaluate better price for the profit Both [5] and [8] considered independent noise for simplicity.
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