Just came across this one. Somewhat interesting. Enjoy. V. ************************************************** "The Predictive Power of Zero Intelligence in Financial Markets" BY: J. DOYNE FARMER Santa Fe Institute PAOLO PATELLI Sant'Anna School of Advanced Studies Santa Fe Institute ILIJA I. ZOVKO Santa Fe Institute University of Amsterdam Document: Available from the SSRN Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=483603 Other Electronic Document Delivery: http://www.afajof.org/annual.shtml SSRN only offers technical support for papers downloaded from the SSRN Electronic Paper Collection location. When URLs wrap, you must copy and paste them into your browser eliminating all spaces. Paper ID: AFA 2004 San Diego Meetings Date: November 16, 2003 Contact: PAOLO PATELLI Email: Mailtoaolo@black.gelso.unitn.it Postal: Sant'Anna School of Advanced Studies Department of Economics I-56127 Pisa, ITALY Co-Auth: J. DOYNE FARMER Email: Mailto:email@example.com Postal: Santa Fe Institute 1399 Hyde Park Road Santa Fe, NM 87501 UNITED STATES Co-Auth: ILIJA I. ZOVKO Email: Mailto:firstname.lastname@example.org Postal: Santa Fe Institute 1399 Hyde Park Road Santa Fe, NM 87501 UNITED STATES ABSTRACT: Standard models in economics are based on intelligent agents that maximize utility. However, there may be situations where constraints imposed by market institutions are more important than intelligent agent behavior. We use data from the London Stock Exchange to test a simple model in which zero intelligence agents place orders to trade at random. The model treats the statistical mechanics of the interaction of order placement, price formation, and the accumulation of stored supply and demand, and makes predictions that can be stated as simple expressions in terms of measurable quantities such as order arrival rates. The agreement between model and theory is excellent, explaining 96% of the variance of the bid-ask spread across stocks and 76% of the price diffusion rate. We also study the market impact function, describing the response of prices to orders. The non-dimensional coordinates dictated by the model collapse data from different stocks onto a single curve, suggesting a corresponding understanding of supply and demand. Thus, it appears that the price formation mechanism strongly constrains the statistical properties of the market, playing a more important role than the strategic behavior of agents.