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Study on the chaos model of liquidity in the stock market
Author(s) -
Chen You,
Xuefeng Song
Publication year - 2003
Publication title -
systems research and behavioral science
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.371
H-Index - 45
eISSN - 1099-1743
pISSN - 1092-7026
DOI - 10.1002/sres.565
Subject(s) - market liquidity , economics , stock market , market maker , financial economics , stock (firearms) , econometrics , monetary economics , mechanical engineering , paleontology , horse , biology , engineering
For a stock market, a critical problem is the maintenance of its liquidity. Market liquidity can be described in various ways, in particular, in terms of the bid/offer spread and the market depth. A model of market liquidity dynamics has been proposed in the literature. In our study, we improve on this model. On the one hand, we think that trading volume is determined by the total number of traders, as well as the relations between the numbers of buyers and sellers, while the model of Schmidt only considered the first term. On the other hand, Schmidt assumes that the number of ‘newcomers’ in the market is in proportion to the current number of trades. However, we all know that the continual rising or decrease of the price will also attract more buyers or sellers, that is, ‘newcomers’, into the market, which Schmidt has not taken for granted. On the assumption that price variation can be neglected, we discuss the conditions in which chaos will emerge through analysis of the Lyapunov exponent. Finally, we implement a computer simulation of the model in MATLAB, and obtain more interesting results. Copyright © 2003 John Wiley & Sons, Ltd.