A Law of Large Numbers for Limit Order Books
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Abstract: We define a stochastic model of a two-sided limit order book in terms of its key quantities extit{best bid [ask] price} and the extit{standing buy [sell] volume density}. For a simple scaling of the discreteness parameters, that keeps the expected volume rate over the considered price interval invariant, we prove a limit theorem. The limit theorem states that, given regularity conditions on the random order flow, the key quantities converge in probability to a tractable continuous limiting model. In the limit model the buy and sell volume densities are given as the unique solution to first-order linear hyperbolic PDEs, specified by the expected order flow parameters.
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