High frequency trading strategies, market fragility and price spikes: an agent based model perspective

Given recent requirements for ensuring the robustness of algorithmic trading strategies laid out in the Markets in Financial Instruments Directive II, this paper proposes a novel agent-based simulation for exploring algorithmic trading strategies. Five different types of agents are present in the market. The statistical properties of the simulated market are compared with equity market depth data from the Chi-X exchange and found to be significantly similar. The model is able to reproduce a number of stylised market properties including: clustered volatility, autocorrelation of returns, long memory in order flow, concave price impact and the presence of extreme price events. The results are found to be insensitive to reasonable parameter variations

Intraday industry-specific spillover effect in European equity markets

This paper investigates the existence of financial contagion between the US and 10 European stock markets. Using intraday minute per minute data of a large set of 374 equities from three different industries over the period from January to June 2011 we investigate the impact of increased volatility in the US on the cross-country industry level spillover effect. Self-built industry indices are used which allow implementing the same index methodology across different markets. We first show that spillover of asset price volatility from the US to European markets does exist; the greatest spike in the volatility in the target markets is observed in the first minute and absorbed in the first five minutes after the volatility increase. Second, we can state that Euro denominated markets amplify the spillover effect of volatility from the US market. Third, we provide evidence on the industry heterogeneity of the spillover effects and claim that an analysis of financial contagion across industries is desirable instead of the use of global market indices