Random walks, liquidity molasses and critical response in financial markets
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Publication:5484636
Abstract: Stock prices are observed to be random walks in time despite a strong, long term memory in the signs of trades (buys or sells). Lillo and Farmer have recently suggested that these correlations are compensated by opposite long ranged fluctuations in liquidity, with an otherwise permanent market impact, challenging the scenario proposed in Quantitative Finance 4, 176 (2004), where the impact is *transient*, with a power-law decay in time. The exponent of this decay is precisely tuned to a critical value, ensuring simultaneously that prices are diffusive on long time scales and that the response function is nearly constant. We provide new analysis of empirical data that confirm and make more precise our previous claims. We show that the power-law decay of the bare impact function comes both from an excess flow of limit order opposite to the market order flow, and to a systematic anti-correlation of the bid-ask motion between trades, two effects that create a `liquidity molasses' which dampens market volatility.
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Cites work
- scientific article; zbMATH DE number 1059167 (Why is no real title available?)
- Large stock price changes: volume or liquidity?
- More statistical properties of order books and price impact
- Order book approach to price impact
- VOLATILITY CLUSTERING IN FINANCIAL MARKETS: A MICROSIMULATION OF INTERACTING AGENTS
Cited in
(28)- Limit-order book resiliency after effective market orders: spread, depth and intensity
- Bayesian inference of the fractional Ornstein-Uhlenbeck process under a flow sampling scheme
- The inelastic market hypothesis: a microstructural interpretation
- Illiquidity premium and expected stock returns in the UK: a new approach
- Relation between bid–ask spread, impact and volatility in order-driven markets
- Do price trajectory data increase the efficiency of market impact estimation?
- Optimal execution with non-linear transient market impact
- Why is equity order flow so persistent?
- Effects of intervaling on high-frequency realized higher-order moments
- The tick-by-tick dynamical consistency of price impact in limit order books
- Fluctuations and response in financial markets: the subtle nature of `random' price changes
- The fine-structure of volatility feedback. I: Multi-scale self-reflexivity
- Deep order flow imbalance: Extracting alpha at multiple horizons from the limit order book
- The identification of price jumps
- Latency and liquidity provision in a limit order book
- Reduced form modeling of limit order markets
- Strategic Execution Trajectories
- No-dynamic-arbitrage and market impact
- How efficiency shapes market impact
- The price impact of order book events: market orders, limit orders and cancellations
- Short-term market reaction after extreme price changes of liquid stocks
- The non-random walk of stock prices: the long-term correlation between signs and sizes
- Extension and verification of the asymmetric autoregressive conditional duration models
- Discrete homotopy analysis for optimal trading execution with nonlinear transient market impact
- Market efficiency and the long-memory of supply and demand: is price impact variable and permanent or fixed and temporary?
- Linear models for the impact of order flow on prices. I. History dependent impact models
- Mechanical vs. informational components of price impact
- When is cross impact relevant?
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