Monday, November 28, 2016

Can Agent-Based Models Probe Market Microstructure? Donovan Platt, Tim Gebbie (2016)

Can Agent-Based Models Probe Market Microstructure?
Authors: Donovan Platt, Tim Gebbie
Abstract: We extend prior evidence that naively using intraday agent-based models that involve realistic order-matching processes for modeling continuous-time double auction markets seems to fail to be able to provide a robust link between data and many model parameters, even when these models are able to reproduce a number of well-known stylized facts of return time series. We demonstrate that while the parameters of intraday agent-based models rooted in market microstructure can be meaningfully calibrated, those exclusively related to agent behaviors and incentives remain problematic. This could simply be a failure of the calibration techniques used but we argue that the observed parameter degeneracies are most likely a consequence of the realistic matching processes employed in these models. This suggests that alternative approaches to linking data, phenomenology and market structure may be necessary and that the stylized fact-centric validation of intraday agent-based models is insufficient, and warns that increased mechanistic complexity of agent-based market models may lead to flawed insights.

Comments: 15 pages, 8 figures
Subjects: Computational Finance (q-fin.CP); Trading and Market Microstructure (q-fin.TR)
Cite as: arXiv:1611.08510 [q-fin.CP]
 (or arXiv:1611.08510v1 [q-fin.CP] for this version)

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