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Research Collection Lee Kong Chian School Of Business

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An Analysis Of Extreme Price Shocks And Illiquidity Among Systematic Trend Followers, Bernard Lee, Shih-Fen Cheng, Annie Koh Jun 2010

An Analysis Of Extreme Price Shocks And Illiquidity Among Systematic Trend Followers, Bernard Lee, Shih-Fen Cheng, Annie Koh

Research Collection Lee Kong Chian School Of Business

We construct an agent-based model to study the interplay between extreme price shocks and illiquidity in the presence of systematic traders known as trend followers. The agent-based approach is particularly attractive in modeling commodity markets because the approach allows for the explicit modeling of production, capacities, and storage constraints. Our study begins by using the price stream from a market simulation involving human participants and studies the behavior of various trend-following strategies, assuming initially that their participation will not impact the market. We notice an incremental deterioration in strategy performance as and when strategies deviate further and further from the ...