Simple model of a limit order-driven market

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We introduce and study a simple model of a limit order-driven market. Traders in this model can either trade stock (or any other risky asset for that matter) at the market price or place a limit order, i.e., an instruction to buy (sell) a certain amount of the stock if its price falls below (raises above) a predefined level. The choice between these two options is purely random (there are no strategies involved), and the execution price of a limit order is determined simply by offsetting the most recent market price by a random amount. Numerical simulations of this model revealed that despite such minimalistic rules the price pattern generated by this model has such realistic features as `fat' tails of the probability distribution of price fluctuations, characterized by a crossover between two power law exponents, long range correlations of the volatility, and a non-trivial Hurst exponent of the price signal.

Original languageEnglish (US)
Pages (from-to)571-578
Number of pages8
JournalPhysica A: Statistical Mechanics and its Applications
Issue number3
StatePublished - Apr 15 2000
Externally publishedYes

ASJC Scopus subject areas

  • Statistics and Probability
  • Condensed Matter Physics


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