Work

High-Frequency Financial Market Simulation and Flash Crash Scenarios Analysis: An Agent-Based Modelling Approach

Year: 2024

Type: article

Abstract: This paper describes simulations and analysis of flash crash scenarios in an agent-based modelling framework.We design, implement, and assess a novel high-frequency agent-based financial market simulator that generates realistic millisecond-level financial price time series for the E-Mini S&P 500 futures market.Specifically, a microstructure model of a single security traded on a central limit order book is provided, where different types of traders follow different behavioural rules.The model is calibrated using the machine learning surrogate modelling approach.Statistical test and moment coverage ratio results show that the model has excellent capability of reproducing realistic stylised facts in financial markets.By introducing an institutional trader that mimics the real-world Sell Algorithm on May 6th, 2010, the proposed high-frequency agent-based financial market simulator is used to simulate the Flash Crash that took place on that day.We scrutinise the market dynamics during the simulated flash crash and show that the simulated dynamics are consistent with what happened in historical flash crash scenarios.With the help of Monte Carlo simulations, we discover functional relationships between the amplitude of the simulated 2010 Flash Crash and three conditions: the percentage of volume of the Sell Algorithm, the market maker inventory limit, and the trading frequency of fundamental traders.Similar analyses are carried out for mini flash crash events.An innovative "Spiking Trader" is introduced to the model, replicating real-world scenarios that could precipitate mini flash crash events.We analyse the market dynamics during the course of a typical simulated mini flash crash event and study the conditions affecting its characteristics.The proposed model can be used for testing resiliency and robustness of trading algorithms and providing advice for policymakers.

Source: Journal of Artificial Societies and Social Simulation

DOI: 10.18564/jasss.5403

Authors: Kang Gao, Perukrishnen Vytelingum, Stephen Weston, Wayne Luk, Ce Guo

Institution: Imperial College London

Language: English

Topic: Complex Systems and Time Series Analysis

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: gold

Estimated APC paid: $1,300

Funders: China Scholarship Council, Engineering and Physical Sciences Research Council