Business Intelligence

Adding To The Regulators Toolbox: Integration And Extension Of Two Leading Market Models

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Executive Summary

As demonstrated during the recent financial crisis, regulators require additional analytical tools to assess systemic risk in the financial sector. This paper describes one such tool; namely a novel market modeling and analysis capability. The authors' model builds upon two leading market models: one which emphasizes market micro-structure and another which emphasizes ecology of trading strategies. They address a limitation of market modeling, namely the consideration of only one dominant trading strategy (i.e., long positions). The model aligns closely with several widely held stylized facts of financial markets. And a final contribution of this work stems from the empirical analysis of the fractal nature of both empirical markets and the market model.

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