Price Tails in the Smith and Farmer's Model

Abstract

We analytically prove that the tails of the price increments in the model by Smith et al. [2003] are fat with the tail exponent one if the initial order books are empty; however, they become thin if an initial call auction is held before the start of the trading. This way, our results point out to the stabilizing role of the initial call auction.limit order market, continuous double auction, price increments, fat tails, tail exponent