Simulating and analyzing order book data: the queue-reactive model
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Publication:5367351
DOI10.1080/01621459.2014.982278zbMATH Open1373.62519arXiv1312.0563OpenAlexW3126008239MaRDI QIDQ5367351FDOQ5367351
Authors: Weibing Huang, Charles-Albert Lehalle, Mathieu Rosenbaum 
Publication date: 13 October 2017
Published in: Journal of the American Statistical Association (Search for Journal in Brave)
Abstract: Through the analysis of a dataset of ultra high frequency order book updates, we introduce a model which accommodates the empirical properties of the full order book together with the stylized facts of lower frequency financial data. To do so, we split the time interval of interest into periods in which a well chosen reference price, typically the mid price, remains constant. Within these periods, we view the limit order book as a Markov queuing system. Indeed, we assume that the intensities of the order flows only depend on the current state of the order book. We establish the limiting behavior of this model and estimate its parameters from market data. Then, in order to design a relevant model for the whole period of interest, we use a stochastic mechanism that allows for switches from one period of constant reference price to another. Beyond enabling to reproduce accurately the behavior of market data, we show that our framework can be very useful for practitioners, notably as a market simulator or as a tool for the transaction cost analysis of complex trading algorithms.
Full work available at URL: https://arxiv.org/abs/1312.0563
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