IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v134y2024ics0264999324000646.html
   My bibliography  Save this article

Market price determination: Interpreting quote order imbalance under zero-profit equilibrium

Author

Listed:
  • Long, Yunshen
  • Yan, Jingzhou
  • Wu, Liang
  • Long, Xingchen

Abstract

We address the challenge of accurately determining market prices in order-driven markets, where the granularity of price adjustments is set by exchange rules, such as minimum increments of 0.01. Our approach advances traditional pricing models in accuracy by interpreting the dynamics of quote order imbalance, defined as the difference in volume between buy and sell orders at the best available prices, within a zero-profit equilibrium framework. This framework assumes that market competition leads to a state where no additional profit can be made from these imbalances. Analyzing high-frequency data from China's A-share market, we demonstrate the variable impact of order imbalances on price formation, influenced by the depth and liquidity of the market. We also uncover a potential threshold effect of order flow autocorrelation on pricing. Our findings enhance market microstructure research and high-frequency trading strategies by offering a valuable tool for understanding price formation's complex dynamics.

Suggested Citation

  • Long, Yunshen & Yan, Jingzhou & Wu, Liang & Long, Xingchen, 2024. "Market price determination: Interpreting quote order imbalance under zero-profit equilibrium," Economic Modelling, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:ecmode:v:134:y:2024:i:c:s0264999324000646
    DOI: 10.1016/j.econmod.2024.106708
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999324000646
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2024.106708?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:134:y:2024:i:c:s0264999324000646. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.