The price dynamics of common trading strategies
J. Doyne Farmer, Shareen Joshi
Abstract
A deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices. This paper uses a market maker based method of price formation to study the price dynamics induced by several commonly used financial trading strategies, showing how they amplify noise, induce structure in prices, and cause phenomena such as excess and clustered volatility.
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