The power of patience: a behavioural regularity in limit-order placement

DOI10.1088/1469-7688/2/5/308MaRDI QIDQ4646802zbMATH OpenOpenAlexFDO

Authors Ilija I. Zovko, J. Doyne Farmer

Publication date 14 January 2019

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/0206280

zbMATH Keywords

time seriesautocorrelation functionlimit-order placement regularity

Mathematics Subject Classification ID

Time series, auto-correlation, regression, etc. in statistics (GARCH) (62M10) Applications of statistics to actuarial sciences and financial mathematics (62P05) Actuarial science and mathematical finance (91G99)

Abstract: In this paper we demonstrate a striking regularity in the way people place limit orders in financial markets, using a data set consisting of roughly seven million orders from the London Stock Exchange. We define the relative limit price as the difference between the limit price and the best price available. Merging the data from 50 stocks, we demonstrate that for both buy and sell orders, the unconditional cumulative distribution of relative limit prices decays roughly as a power law with exponent approximately 1.5. This behavior spans more than two decades, ranging from a few ticks to about 2000 ticks. Time series of relative limit prices show interesting temporal structure, characterized by an autocorrelation function that asymptotically decays as tau^(-0.4). Furthermore, relative limit price levels are positively correlated with and are led by price volatility. This feedback may potentially contribute to clustered volatility.

Recommendations

• Limit order placement as an utility maximization problem and the origin of power law distribution of limit order prices
• Studies of the limit order book around large price changes
• Price fluctuations from the order book perspective - empirical facts and a simple model
• The market impact of a limit order
• Non-constant rates and over-diffusive prices in a simple model of limit order markets

Cites work

• Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation
• Generalized autoregressive conditional heteroscedasticity
• Statistical properties of stock order books: empirical results and models
• Testing for nonlinearity in time series: the method of surrogate data

Cited in

(12)

• Modeling high-frequency non-homogeneous order flows by compound Cox processes
• Non-constant rates and over-diffusive prices in a simple model of limit order markets
• Understanding flash crash contagion and systemic risk: a micro-macro agent-based approach
• Limit order placement as an utility maximization problem and the origin of power law distribution of limit order prices
• An analysis of price impact function in order-driven markets
• Simple stochastic order-book model of swarm behavior in continuous double auction
• Modeling high-frequency order flow imbalance by functional limit theorems for two-sided risk processes
• Order aggressiveness, pre-trade transparency, and long memory in an order-driven market
• Statistical theory of the continuous double auction
• Heavy tailed distributions in closing auctions
• What really causes large price changes?
• The impact of heterogeneous trading rules on the limit order book and order flows

This page was built for publication: The power of patience: a behavioural regularity in limit-order placement

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q4646802)