Statistical theory of the continuous double auction
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Publication:4647293
DOI10.1088/1469-7688/3/6/307zbMATH Open1405.91241OpenAlexW2120859246WikidataQ56689097 ScholiaQ56689097MaRDI QIDQ4647293FDOQ4647293
Authors:
Publication date: 14 January 2019
Published in: Quantitative Finance (Search for Journal in Brave)
Abstract: Most modern financial markets use a continuous double auction mechanism to store and match orders and facilitate trading. In this paper we develop a microscopic dynamical statistical model for the continuous double auction under the assumption of IID random order flow, and analyze it using simulation, dimensional analysis, and theoretical tools based on mean field approximations. The model makes testable predictions for basic properties of markets, such as price volatility, the depth of stored supply and demand vs. price, the bid-ask spread, the price impact function, and the time and probability of filling orders. These predictions are based on properties of order flow and the limit order book, such as share volume of market and limit orders, cancellations, typical order size, and tick size. Because these quantities can all be measured directly there are no free parameters. We show that the order size, which can be cast as a nondimensional granularity parameter, is in most cases a more significant determinant of market behavior than tick size. We also provide an explanation for the observed highly concave nature of the price impact function. On a broader level, this work suggests how stochastic models based on zero-intelligence agents may be useful to probe the structure of market institutions. Like the model of perfect rationality, a stochastic-zero intelligence model can be used to make strong predictions based on a compact set of assumptions, even if these assumptions are not fully believable.
Full work available at URL: https://arxiv.org/abs/cond-mat/0210475
Recommendations
Applications of statistics to actuarial sciences and financial mathematics (62P05) Auctions, bargaining, bidding and selling, and other market models (91B26) Portfolio theory (91G10)
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Cited In (59)
- Exact solution to a generalised Lillo-Mike-Farmer model with heterogeneous order-splitting strategies
- Non-uniformly sampled simulated price impact of an order-book
- Bid-ask spread dynamics: large upward jump with geometric catastrophes
- Optimal auction duration: a price formation viewpoint
- Price dynamics in an order-driven market with Bayesian learning
- Optimal inventory management and order book modeling
- A steady-state model of the continuous double auction
- Order execution probability and order queue in limit order markets
- The order book as a queueing system: average depth and influence of the size of limit orders
- Market impact with multi-timescale liquidity
- Limits of Limit-Order Books
- Particle-scale modelling of financial price dynamics
- Price impact of large orders using Hawkes processes
- Order book model with herd behavior exhibiting long-range memory
- High-dimensional Hawkes processes for limit order books: modelling, empirical analysis and numerical calibration
- A stochastic Stefan-type problem under first-order boundary conditions
- Long-time behavior of a Hawkes process-based limit order book
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- Endogenous liquidity crises
- Disentangling and quantifying market participant volatility contributions
- An analysis of price impact function in order-driven markets
- Simple stochastic order-book model of swarm behavior in continuous double auction
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- When does inequality freeze an economy?
- A fully consistent, minimal model for nonlinear market impact
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- Modeling dynamic sealed-offer \(k\)-double auctions using a mixture of distributions
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- What really causes large price changes?
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- Analysis of short-term price behavior under continuous double auction mechanism
- Modelling intensities of order flows in a limit order book
- A stochastic partial differential equation model for limit order book dynamics
- Probabilistic properties of the continuous double auction
- Confidence interval for correlation estimator between latent processes
- Functional Limit Theorems for a Simple Auction
- Microstructure-based order placement in a continuous double auction agent based model
- Exact solution to two-body financial dealer model: revisited from the viewpoint of kinetic theory
- Ergodicity and diffusivity of Markovian order book models: a general framework
- A semi-Markovian modeling of limit order markets
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