Multi-agent–based Order Book Model of financial markets

Institute of Physics, Johannes Gutenberg University of Mainz Staudinger Weg 7, 55099 Mainz, Germany

Corresponding author: preis@uni-mainz.de

Received: 16 May 2006
Accepted: 20 June 2006

Abstract

We introduce a simple model for simulating financial markets, based on an order book, in which several agents trade one asset at a virtual exchange continuously. For a stationary market the structure of the model, the order flow rates of the different kinds of order types and the used price time priority matching algorithm produce only a diffusive price behavior. We show that a market trend, i.e. an asymmetric order flow of any type, leads to a non-trivial Hurst exponent for the price development, but not to “fat-tailed” return distributions. When one additionally couples the order entry depth to the prevailing trend, also the stylized empirical fact of “fat tails” can be reproduced by our Order Book Model.