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The price impact of order book events: market orders, limit orders and cancellations

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  • Zolt�n Eisler
  • Jean-Philippe Bouchaud
  • Julien Kockelkoren
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    Abstract

    While the long-ranged correlation of market orders and their impact on prices has been relatively well studied in the literature, the corresponding studies of limit orders and cancellations are scarce. We provide here an empirical study of the cross-correlation between all these different events, and their respective impact on future price changes. We define and extract from the data the ‘bare’ impact these events would have if they were to happen in isolation. For large tick stocks, we show that a model where the bare impact of all events is permanent and non-fluctuating is in good agreement with the data. For small tick stocks, however, bare impacts must contain a history-dependent part, reflecting the internal fluctuations of the order book. We show that this effect can be accurately described by an autoregressive model of the past order flow. This framework allows us to decompose the impact of an event into three parts: an instantaneous jump component, the modification of the future rates of the different events, and the modification of the jump sizes of future events. We compare in detail the present formalism with the temporary impact model that was proposed earlier to describe the impact of market orders when other types of events are not observed. Finally, we extend the model to describe the dynamics of the bid--ask spread.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 12 (2012)
    Issue (Month): 9 (September)
    Pages: 1395-1419

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    Handle: RePEc:taf:quantf:v:12:y:2012:i:9:p:1395-1419

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    Web page: http://www.tandfonline.com/RQUF20

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    Cited by:
    1. Iacopo Mastromatteo & Bence Toth & Jean-Philippe Bouchaud, 2013. "Agent-based models for latent liquidity and concave price impact," Papers 1311.6262, arXiv.org.
    2. Damian Eduardo Taranto & Giacomo Bormetti & Fabrizio Lillo, 2014. "The adaptive nature of liquidity taking in limit order books," Papers 1403.0842, arXiv.org, revised Apr 2014.
    3. Aur\'elien Alfonsi & Pierre Blanc, 2014. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Papers 1404.0648, arXiv.org.
    4. Gianbiagio Curato & Fabrizio Lillo, 2013. "Modeling the coupled return-spread high frequency dynamics of large tick assets," Papers 1310.4539, arXiv.org.
    5. Nico Achtsis & Dirk Nuyens, 2013. "A Monte Carlo method for optimal portfolio executions," Papers 1312.5919, arXiv.org.
    6. Aurélien Alfonsi & Pierre Blanc, 2014. "Dynamic optimal execution in a mixed-market-impact Hawkes price model," Working Papers hal-00971369, HAL.
    7. Weibing Huang & Charles-Albert Lehalle & Mathieu Rosenbaum, 2013. "Simulating and analyzing order book data: The queue-reactive model," Papers 1312.0563, arXiv.org, revised Sep 2014.

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