The predictive power of zero intelligence in financial markets.

ABSTRACT: Standard models in economics stress the role of intelligent agents who maximize utility. However, there may be situations where constraints imposed by market institutions dominate strategic agent behavior. We use data from the London Stock Exchange to test a simple model in which minimally intelligent agents place orders to trade at random. The model treats the statistical mechanics of order placement, price formation, and the accumulation of revealed supply and demand within the context of the continuous double auction and yields simple laws relating order-arrival rates to statistical properties of the market. We test the validity of these laws in explaining cross-sectional variation for 11 stocks. The model explains 96% of the variance of the gap between the best buying and selling price

SUBMITTER: Farmer JD 

PROVIDER: S-EPMC548562 | biostudies-literature | 2005 Feb

REPOSITORIES: biostudies-literature