A semi-Markovian modeling of limit order markets

DOI10.1137/15M1015406zbMATH Open1370.60155arXiv1601.01710OpenAlexW3121616782MaRDI QIDQ5266360FDOQ5266360

Authors: Anatoliy Swishchuk, N. Vadori 

Publication date: 2 June 2017

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: R. Cont and A. de Larrard (SIAM J. Finan. Math, 2013) introduced a tractable stochastic model for the dynamics of a limit order book, computing various quantities of interest such as the probability of a price increase or the diffusion limit of the price process. As suggested by empirical observations, we extend their framework to 1) arbitrary distributions for book events inter-arrival times (possibly non-exponential) and 2) both the nature of a new book event and its corresponding inter-arrival time depend on the nature of the previous book event. We do so by resorting to Markov renewal processes to model the dynamics of the bid and ask queues. We keep analytical tractability via explicit expressions for the Laplace transforms of various quantities of interest. We justify and illustrate our approach by calibrating our model to the five stocks Amazon, Apple, Google, Intel and Microsoft on June 21^{st} 2012. As in R. Cont and A. de Larrard, the bid-ask spread remains constant equal to one tick, only the bid and ask queues are modeled (they are independent from each other and get reinitialized after a price change), and all orders have the same size.

Full work available at URL: https://arxiv.org/abs/1601.01710

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zbMATH Keywords

Weibull distributionlimit order bookMarkov renewal processduration analysissemi-Markov processdiffusion limitgamma distributionsBurr distribution

Mathematics Subject Classification ID

Diffusion processes (60J60) Queues and service in operations research (90B22) Queueing theory (aspects of probability theory) (60K25) Functional limit theorems; invariance principles (60F17) Markov renewal processes, semi-Markov processes (60K15) Applications of Markov renewal processes (reliability, queueing networks, etc.) (60K20) Microeconomic theory (price theory and economic markets) (91B24) Stochastic models in economics (91B70) Optimal stochastic control (93E20)

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Cited In (13)

• ROCOF of higher order for semi-Markov processes
• Stochastic modelling of big data in finance
• The self-financing equation in limit order book markets
• An econometric analysis of drawdown based measures
• A micro-to-macro approach to returns, volumes and waiting times
• Modelling of limit order books by general compound Hawkes processes with implementations
• GENERAL SEMI-MARKOV MODEL FOR LIMIT ORDER BOOKS
• A level-1 limit order book with time dependent arrival rates
• Limits of semistatic trading strategies
• Exact Hurst exponent and crossover behavior in a limit order market model
• A semi-martingale representation for a semi-Markov chain with application to finance
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