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Dynamic Order Submission And Herding Behavior In Electronic Trading

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  • Wing Lon Ng
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    Abstract

    Abstract I analyze the dynamic trading behavior of market participants by developing a bivariate modeling framework for describing the arrival process of buy and sell orders in a limit order book. The model contains an extended autoregressive conditional duration model with a flexible generalized Beta distribution to explain the duration process, combined with a dynamic logit model to capture the traders' order submission strategy. I find that the state of the order book as well as the speed of the order arrival have a significant influence on the order placement, inducing temporal asymmetric market movements. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 33 (2010)
    Issue (Month): 1 ()
    Pages: 27-43

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    Handle: RePEc:bla:jfnres:v:33:y:2010:i:1:p:27-43

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    Web page: http://www.southwesternfinance.org/
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    1. Biais, Bruno & Hillion, Pierre & Spatt, Chester, 1995. " An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1655-89, December.
    2. Engle, Robert F. & Russell, Jeffrey R., 1997. "Forecasting the frequency of changes in quoted foreign exchange prices with the autoregressive conditional duration model," Journal of Empirical Finance, Elsevier, Elsevier, vol. 4(2-3), pages 187-212, June.
    3. Fernandes, Marcelo & Grammig, Joachim, 2005. "Nonparametric specification tests for conditional duration models," Journal of Econometrics, Elsevier, Elsevier, vol. 127(1), pages 35-68, July.
    4. Luc Bauwens & Pierre Giot & Joachim Grammig & David Veredas, 2004. "A comparison of financial duration models via density forecast," ULB Institutional Repository 2013/136218, ULB -- Universite Libre de Bruxelles.
    5. Anthony D. Hall & Nikolaus Hautsch, 2004. "Order Aggressiveness and Order Book Dynamics," FRU Working Papers, University of Copenhagen. Department of Economics. Finance Research Unit 2005/04, University of Copenhagen. Department of Economics. Finance Research Unit.
    6. Alfonso Dufour & Robert F Engle, 2000. "The ACD Model: Predictability of the Time Between Concecutive Trades," ICMA Centre Discussion Papers in Finance, Henley Business School, Reading University icma-dp2000-05, Henley Business School, Reading University.
    7. Carrasco, Marine & Chen, Xiaohong, 2002. "Mixing And Moment Properties Of Various Garch And Stochastic Volatility Models," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 18(01), pages 17-39, February.
    8. Ranaldo, Angelo, 2004. "Order aggressiveness in limit order book markets," Journal of Financial Markets, Elsevier, Elsevier, vol. 7(1), pages 53-74, January.
    9. Tina Hviid Rydberg & Neil Shephard, 2003. "Dynamics of Trade-by-Trade Price Movements: Decomposition and Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 1(1), pages 2-25.
    10. McDonald, James B. & Xu, Yexiao J., 1995. "A generalization of the beta distribution with applications," Journal of Econometrics, Elsevier, Elsevier, vol. 69(2), pages 427-428, October.
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    13. FERNANDES, Marcelo & GRAMMIG, Joachim, 2001. "A family of autoregressive conditional duration models," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2001036, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    14. Charles Cao & Oliver Hansch & Xiaoxin Wang, 2008. "Order Placement Strategies In A Pure Limit Order Book Market," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, Southern Finance Association;Southwestern Finance Association, vol. 31(2), pages 113-140.
    15. Christophe BISIÈRE & Thierry KAMIONKA, 2000. "Timing of Orders, Order Aggressiveness and the Order Book at the Paris Bourse," Annales d'Economie et de Statistique, ENSAE, issue 60, pages 43-72.
    16. Parlour, Christine A, 1998. "Price Dynamics in Limit Order Markets," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 789-816.
    17. Dan Ladley & Klaus Reiner Schenk-Hoppe, 2007. "Do Stylised Facts of Order Book Markets Need Strategic Behaviour?," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 07-20, Swiss Finance Institute.
    18. Maria Pacurar, 2008. "Autoregressive Conditional Duration Models In Finance: A Survey Of The Theoretical And Empirical Literature," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 22(4), pages 711-751, 09.
    19. Roberto Pascual & David Veredas, 2009. "What pieces of limit order book information matter in explaining order choice by patient and impatient traders?," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(5), pages 527-545.
    20. Ellul, Andrew & Holden, Craig W. & Jain, Pankaj & Jennings, Robert, 2007. "Order dynamics: Recent evidence from the NYSE," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(5), pages 636-661, December.
    21. Russell, Jeffrey R. & Engle, Robert F., 2005. "A Discrete-State Continuous-Time Model of Financial Transactions Prices and Times: The Autoregressive Conditional Multinomial-Autoregressive Conditional Duration Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 23, pages 166-180, April.
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    Cited by:
    1. Wei Cui & Anthony Brabazon & Michael O'Neill, 2011. "Dynamic trade execution: a grammatical evolution approach," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 2(1/2), pages 4-31.

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