A simple model of a limit order book

arXiv1205.7017MaRDI QIDQ6233396FDOQ6233396

Publication date: 31 May 2012

Abstract: We formulate a simplified model of a limit order book, in which the arrival process is independent of the current state. We prove a phase transition result: there exist prices

k a p p a_{b}

and

k a p p a_{a}

such that, for any

e p s i l o n > 0

, only finitely many bid (ask) departures occur at prices below

k a p p a_{b} - e p s i l o n

(above

k a p p a_{a} + e p s i l o n

), while the interval

(k a p p a_{b} + e p s i l o n, k a p p a_{a} - e p s i l o n)

infinitely often contains no bids, and infinitely often contains no asks. We derive expressions for

k a p p a_{b}

and

k a p p a_{a}

, which we solve in the case of uniform arrivals. We conjecture the positive recurrence of a modified model, and find the steady-state distribution of the highest bid and of the lowest ask assuming the positive recurrence.

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