Market microstructure
I am one of the founders of the field of “econophysics”. This is distinguished from economics by a more data-driven approach to building fundamental models, breaking away from the standard theoretical template used in economics of utility maximization and equilibrium. Together with Michael Dempster of Cambridge, I started a new journal called Quantitative Finance and served as the co-editor-in-chief for several years.
My contributions to market microstructure include the identification of several striking empirical regularities in financial markets, such as the extraordinary persistence of order flow. Fabrzio Lillo and I observed that there are long periods where the orders flowing into the market are much more likely to be to buy than to sell, and vice versa, with correlations decaying very slowly as a power law. My collaborators and I developed a zero intelligence model for the continuous double auction that was shown to predict the spread between bid and ask prices. A variety of different empirical studies documented the law of market impact, which states that the average change in price due to an order entering the market is proportional to the square root of the order size. This law is remarkable as it is universal, in the sense that the functional form of market impact remains the same as long as markets are operating under “normal” conditions. Our work set the foundation that was eventually developed by the group of Jean-Philippe Bouchaud.
Research publications
2015
Elia Zarinelli, Michele Trecciani, J. Doyne Farmer and Fabrizio Lillo, “Beyond the Square Root: Evidence for Logarithmic Dependence of Market Impact on Size and Participation Rate.” Market Microstructure and Liquidity 1,1 (2015).
Bence Tóth, Imon Palit, Fabrizio Lillo and J. Doyne Farmer, “Why is Order Flow So Persistent?” Journal of Economic Dynamics and Control 51, 218-239 (2015).
2013
J. Doyne Farmer, Austin Gerig, Fabrizio Lillo and Henri Waelbroeck, “How Efficiency Shapes Market Impact.” Quantitative Finance (2013) 13:11, 1743-1758.
J. Doyne Farmer and Spyros Skouras, “An Ecological Perspective On The Future Of Computer Trading.” Quantitative Finance (2013) 13:3, 325-346.
2012
Bence Tóth, Z Eisler, J. Kockelkoren, Jean-Philippe Bouchaud, J. Doyne Farmer, "How Does The Market React To Your Order Flow?" Quantitative Finance 12.7 (2012): 1015-1024.
2010
Bence Tóth, Fabrizio Lillo and J. Doyne Farmer, “Segmentation Algorithm for Non-Stationary Compound Poisson Processes.” European Physics Journal B 78(2) (2010): 235-243.
2009
E. Moro, J. Vicente, L. G. Moyano, A. Gerig, J. D. Farmer, G. Vaglica, F. Lillo and R. Mantegna, “Market Impact and Trading Profile of Hidden Orders in Stock Markets.” Physical Review E 80(6) (2009): 1-8.
Bence Tóth, János Kertész and J. Doyne Farmer, “Studies of the Limit Order Book around Large Price Changes.” European Journal of Physics B 71(4) (2009): 499-510.
2008
G. La Spada, J. D. Farmer and F. Lillo, “The Non-Random Walk of Stock Prices: The Long-Term Correlation between Signs and Sizes.” European Journal of Physics B 64(3-4), 607-614 (2008).
Mike, Szabolcs and J. Doyne Farmer, “An Empirical Behavioral Model of Liquidity and Volatility.” Journal of Economic Dynamics and Control32(1) (2008): 200-234.
2007
J. Doyne Farmer and N. Zamani, “Mechanical vs. Informational Components of Price Impact.” European Physical Journal B 55(2) (2007): 189-200.
Laszlo Gillemot, J. Doyne Farmer and Fabrizio Lillo, “There's More to Volatility than Volume.” Quantitative Finance 6(5) (2007): 371-384.
2006
J. Doyne Farmer, Austin Gerig, Fabrizio Lillo and Mike Szabolcs, "Market Efficiency and the Long-Memory of Supply and Demand: Is Price Impact Variable and Permanent or Fixed and Temporary?" Quantitative Finance 6(2) (2006): 107-112.
J. Doyne Farmer and F. Lillo, “On the Origin of Power-Law Tails in Price Fluctuations.” Quantitative Finance 4(1) (2004): C7-C11.
2005
Fabrizio Lillo and J. Doyne Farmer, “The Key Role of Liquidity Fluctuations in Determining Large Price Fluctuations.” Fluctuations and Noise Letters 5(2) (2005): L209-L216.
Fabrizio Lillo, Mike Szabolcs and J. Doyne Farmer, “Theory for Long Memory in Supply and Demand.” Physical Review E, 71(6 pt 2) (2005): 287-297.
J. D. Farmer, P. Patelli and I. Zovko, “The Predictive Power of Zero Intelligence in Financial Markets.” PNAS USA 102(6) (2005): 2254-2259.
2004
J. D. Farmer, L. Gillemot, F. Lillo, M. Szabolcs and A. Sen, “What Really Causes Large Price Changes?” Quantitative Finance 4(4) (2004): 383-397.
Fabrizio Lillo and J. Doyne Farmer, “The Long Memory of the Efficient Market.” Studies in Nonlinear Dynamics & Econometrics 8(3) (2004): 1226.
J. Doyne Farmer and F. Lillo, “On the Origin of Power-Law Tails in Price Fluctuations.” Quantitative Finance 4(1) (2004): C7-C11.
2003
G. Iori, M. G. Daniels, J. D. Farmer, L. Gillemot, S. Krishnamurthy and E. Smith, “An Analysis of Price Impact Function in Order-Driven Markets.” Physica A 324(1-2) (2003): 146-151.
E. Smith, J. D. Farmer, L. Gillemot and S. Krishnamurthy, “Statistical Theory of the Continuous Double Auction.” Quantitative Finance 3(6) (2003): 481-514.
Fabrizio Lillo, J. Doyne Farmer and Rosario N. Mantegna, “Master Curve for Price-Impact Function.” Nature 421(6919) (2003): 129-130.
M. G. Daniels, J. D. Farmer, L. Gillemot, G. Iori and D. E. Smith, “Quantitative Model of Price Diffusion and Market Friction Based on Trading as a Mechanistic Random Process.” Physical Review Letters 90(10) (2003): 108102-108104.
2002
Ilija Zovko and J. Doyne Farmer, “The Power of Patience: A Behavioral Regularity in Limit Order Placement.” Quantitative Finance 2(5) (2002): 387-392.
J. Doyne Farmer and Shareen Joshi, “The Price Dynamics of Common Trading Strategies.” Journal of Economic Behavior and Organization 49(2) (2002): 149-171.
J. Doyne Farmer, “Market Force, Ecology, and Evolution.” Industrial and Corporate Change 11(5) (2002): 895-953.
1999
J. Doyne Farmer, “Physicists Attempt to Scale the Ivory Towers of Finance.” Computational Science and Engineering (IEEE) 1(6) (1999): 26-39.