Time-varying arbitrage and dynamic price discovery

Bart Frijns, Remco C.J. Zwinkels*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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Abstract

We introduce time-varying measures of price discovery based on underlying profit maximizing behavior by combining the heterogeneous agent modelling literature with the market microstructure literature. We set up a heterogeneous agent model with arbitrageurs and trend chasers (chartists), and allow agents to switch between the strategies conditional on recent forecasting performance. Estimation of the model on Canadian-US cross-listed stocks on high-frequency data shows that there is significant heterogeneity and switching, causing ample variation in the information processing capacity of markets.

Original languageEnglish
Pages (from-to)485-502
Number of pages18
JournalJournal of Economic Dynamics and Control
Volume91
Early online date15 Apr 2018
DOIs
Publication statusPublished - Jun 2018

Keywords

  • Heterogeneous agent models
  • Market microstructure
  • Price discovery
  • Time-varying arbitrage

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