Diffusive behavior and the modeling of characteristic times in limit order executions

DOI10.1080/14697680802512408MaRDI QIDQ3645197zbMATH OpenOpenAlexFDO

Authors Zoltán Eisler, Fabrizio Lillo, J. Kertész, Rosario Nunzio Mantegna

Publication date 16 November 2009

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/physics/0701335

zbMATH Keywords

censored dataeconophysicsfirst passage timelimit order marketmicrostructuretime to fill

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Microeconomic theory (price theory and economic markets) (91B24) Auctions, bargaining, bidding and selling, and other market models (91B26) Statistical methods; economic indices and measures (91B82)

Abstract: We present an empirical study of the first passage time (FPT) of order book prices needed to observe a prescribed price change Delta, the time to fill (TTF) for executed limit orders and the time to cancel (TTC) for canceled ones in a double auction market. We find that the distribution of all three quantities decays asymptotically as a power law, but that of FPT has significantly fatter tails than that of TTF. Thus a simple first passage time model cannot account for the observed TTF of limit orders. We propose that the origin of this difference is the presence of cancellations. We outline a simple model, which assumes that prices are characterized by the empirically observed distribution of the first passage time and orders are canceled randomly with lifetimes that are asymptotically power law distributed with an exponent lambda_LT. In spite of the simplifying assumptions of the model, the inclusion of cancellations is enough to account for the above observations and enables one to estimate characteristics of the cancellation strategies from empirical data.

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Cites work

• A simple general approach to inference about the tail of a distribution
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Cited in

(7)

• Sharper asset ranking from total drawdown durations
• Exact Hurst exponent and crossover behavior in a limit order market model
• High-frequency trading model for a complex trading hierarchy
• The order book as a queueing system: average depth and influence of the size of limit orders
• Two price regimes in limit order books: liquidity cushion and fragmented distant field
• Social Physics: A manifesto
• Studies of the limit order book around large price changes

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