A diffusion approximation for limit order book models

DOI10.1016/J.SPA.2018.11.023zbMATH Open1448.60078arXiv1608.01795OpenAlexW2749527371MaRDI QIDQ2010486FDOQ2010486

Ulrich Horst, Dörte Kreher

Publication date: 27 November 2019

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: This paper derives a diffusion approximation for a sequence of discrete-time one-sided limit order book models with non-linear state dependent order arrival and cancellation dynamics. The discrete time sequences are specified in terms of an $R_{+}$-valued best bid price process and an $L_{loc}^2$-valued volume process. It is shown that under suitable assumptions the sequence of interpolated discrete time models is relatively compact in a localized sense and that any limit point satisfies a certain infinite dimensional SDE. Under additional assumptions on the dependence structure we construct two classes of models, which fit in the general framework, such that the limiting SDE admits a unique solution and thus the discrete dynamics converge to a diffusion limit in a localized sense.

Full work available at URL: https://arxiv.org/abs/1608.01795

zbMATH Keywords

limit order bookfunctional limit theoremscaling limitdiffusion limitconvergence of stochastic differential equations

Mathematics Subject Classification ID

Functional limit theorems; invariance principles (60F17) Financial applications of other theories (91G80)

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Cited In (12)

• HYDRODYNAMIC LIMIT OF ORDER-BOOK DYNAMICS
• Modelling of limit order books by general compound Hawkes processes with implementations
• A functional limit theorem for limit order books with state dependent price dynamics
• Title not available (Why is that?)
• From tick data to semimartingales
• Limit order market analysis and modelling: on a universal cause for over-diffusive prices
• A one-level limit order book model with memory and variable spread
• Scaling limit of a limit order book model via the regenerative characterization of Lévy trees
• Modelling the shape of the limit order book
• Jump Diffusion Approximation for the Price Dynamics of a Fully State Dependent Limit Order Book Model
• The microstructure of stochastic volatility models with self-exciting jump dynamics
• A Law of Large Numbers for Limit Order Books

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