Reduced form modeling of limit order markets

DOI10.1080/14697688.2011.589402zbMATH Open1279.91193arXiv1006.4517OpenAlexW2094154574MaRDI QIDQ2873532FDOQ2873532

Authors: Pekka Malo, Teemu Pennanen 

Publication date: 24 January 2014

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: This paper proposes a parametric approach for stochastic modeling of limit order markets. The models are obtained by augmenting classical perfectly liquid market models by few additional risk factors that describe liquidity properties of the order book. The resulting models are easy to calibrate and to analyze using standard techniques for multivariate stochastic processes. Despite their simplicity, the models are able to capture several properties that have been found in microstructural analysis of limit order markets. Calibration of a continuous-time three-factor model to Copenhagen Stock Exchange data exhibits e.g. mean reversion in liquidity as well as the so called crowding out effect which influences subsequent mid-price moves. Our dynamic models are well suited also for analyzing market resiliency after liquidity shocks.

Full work available at URL: https://arxiv.org/abs/1006.4517

Recommendations

• A semi-Markovian modeling of limit order markets
• A stochastic model for order book dynamics
• A stochastic partial differential equation model for limit order book dynamics
• Price dynamics in a Markovian limit order market
• Modelling intensities of order flows in a limit order book

zbMATH Keywords

stochastic modelslimit order markettrading costsliquidity modelling

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Microeconomic theory (price theory and economic markets) (91B24) Stochastic models in economics (91B70)

Cites Work

• Optimal Liquidity Trading*
• Liquidity risk and arbitrage pricing theory
• Martingales and arbitage in securities markets with transaction costs
• Superhedging in illiquid markets
• A stochastic model for order book dynamics
• Optimal execution strategies in limit order books with general shape functions
• MODELING LIQUIDITY EFFECTS IN DISCRETE TIME
• An analysis of the supply curve for liquidity risk through book data
• Galerkin methods in dynamic stochastic programming
• Arbitrage and deflators in illiquid markets
• Computation of estimates in segmented regression and a liquidity effect model
• Random walks, liquidity molasses and critical response in financial markets

Cited In (14)

• Bilateral exchange and competitive equilibrium
• Stochastic modelling of big data in finance
• Optimal investment and contingent claim valuation in illiquid markets
• Title not available (Why is that?)
• The dynamics of ex-ante weighted spread: an empirical analysis
• Resiliency of the limit order book
• Superhedging in illiquid markets
• Dual representation of superhedging costs in illiquid markets
• What drives the sensitivity of limit order books to company announcement arrivals?
• Modelling the shape of the limit order book
• Convex duality in optimal investment under illiquidity
• Introduction to convex optimization in financial markets
• Approximation and comparison of the empirical liquidity cost function for various futures contracts
• On measuring the cost of liquidity in the limit order book

This page was built for publication: Reduced form modeling of limit order markets

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q2873532)