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Price fluctuations from the order book perspective—empirical facts and a simple model

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  • Maslov, Sergei
  • Mills, Mark

Abstract

Statistical properties of an order book and the effect they have on price dynamics were studied using the high-frequency NASDAQ Level II data. It was observed that the size distribution of marketable orders (transaction sizes) has power law tails with an exponent 1+μmarket=2.4±0.1. The distribution of limit order (or quote) sizes was found to be consistent with a power law with an exponent close to 2. A somewhat better fit to this distribution was obtained by using a log-normal distribution which has an effective power law exponent equal to 2 in the middle of the observed range. The depth of the order book measured as a price impact of a hypothetical large market order was observed to be a non-linear function of its size. A large imbalance in the number of limit orders placed at bid and ask sides of the book was shown to lead to a predictable short term price change, which is in accord with the law of supply and demand.

Suggested Citation

  • Maslov, Sergei & Mills, Mark, 2001. "Price fluctuations from the order book perspective—empirical facts and a simple model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 234-246.
    • Handle: RePEc:eee:phsmap:v:299:y:2001:i:1:p:234-246
    DOI: 10.1016/S0378-4371(01)00301-6
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    References listed on IDEAS

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