Microscopic simulation models are often evaluated based on visual inspection of the results. This paper presents formal econometric techniques to compare microscopic simulation (MS) models with real-life data. A related result is a methodology to compare different MS models with each other. For this purpose, possible parameters of interest, such as mean returns, or autocorrelation patterns, are classified and characterized. For each class of characteristics, the appropriate techniques are presented. We illustrate the methodology by comparing the MS model developed by He and Li [J. Econ. Dynam. Control, 2007, 31, 3396-3426, Quant. Finance, 2008, 8, 59-79] with actual data.

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Keywords econometric analysis, financial markets, market friction models, microscopic simulation models
Persistent URL dx.doi.org/10.1080/14697680903460176, hdl.handle.net/1765/19644
Note Accepted manuscript, First Published on: 28 April 2010
Citation
Li, Y., Donkers, B., & Melenberg, B.. (2010). Econometric analysis of microscopic simulation models. Quantitative Finance, 10(10), 1187–1201. doi:10.1080/14697680903460176