Minimal agent-based model for the origin of trading activity in foreign exchange market

Conference Paper

Aloud, Monira . 2011

• Publication Online URL: Minimal agent-based model for the origin of trading activity in foreign exchange market
• Tags: Agent-based modelling, FX market trading activity, Foreign exchange market, High-frequency data
• Conference Name: IEEE Symposium on Computational Intelligence for Financial Engineering & Economics
• Conference Location: Paris, France
• Conference Date: Friday, November 4, 2011
• Sponsoring Organization: IEEE

Publication Abstract

In this paper, we show that a minimal agent-based model for the Foreign Exchange (FX) market is capable of reproducing, to a certain extent, FX market trading activity. The model is minimal in that it has the advantage of having the minimum set of elements necessary for modelling the FX market in order to reproduce the FX market trading activity. The key elements are zero-Intelligence directional-change events traders, historical prices, actual FX traders' behaviour, limit orders, FX market trading sessions, market holidays, and the activation of the initial condition. All of these play a fundamental role. Most importantly, the simulation output is evaluated by contrast against the microscopic behavioural analysis of high-frequency data of individual traders' transactions on an account level provided by OANDA LTD. The results of this comparison prove that the trading agents' behaviour reproduces the FX market trading activity. Overall, the model leads to the identification of the key elements that may be responsible for the emergence of FX market trading activity in an agent-based model.