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A Time-Dependent Markovian Model of a Limit Order Book

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  • Jonathan A. Chávez Casillas

    (University of Rhode Island)

Abstract

This paper considers a Markovian model of a limit order book where time-dependent rates are allowed. With the objective of understanding the mechanisms through which a microscopic model of an orderbook can converge to more general diffusion than a Brownian motion with constant coefficient, a simple time-dependent model is proposed. The model considered here starts by describing the processes that govern the arrival of the different orders such as limit orders, market orders and cancellations. In this sense, this is a microscopic model rather than a “mesoscopic” model where the starting point is usually the point processes describing the times at which the price changes occur and aggregate in these all the information pertaining to the arrival of individual orders. Furthermore, several empirical studies are performed to shed some light into the validity of the modeling assumptions and to verify whether certain stocks satisfy the conditions for their price process to converge to a more complex diffusion.

Suggested Citation

  • Jonathan A. Chávez Casillas, 2024. "A Time-Dependent Markovian Model of a Limit Order Book," Computational Economics, Springer;Society for Computational Economics, vol. 63(2), pages 679-709, February.
    • Handle: RePEc:kap:compec:v:63:y:2024:i:2:d:10.1007_s10614-023-10356-9
    DOI: 10.1007/s10614-023-10356-9
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    References listed on IDEAS

    as
    1. �lvaro Cartea & Sebastian Jaimungal, 2015. "Optimal execution with limit and market orders," Quantitative Finance, Taylor & Francis Journals, vol. 15(8), pages 1279-1291, August.
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    7. Zoltán Eisler & Jean-Philippe Bouchaud & Julien Kockelkoren, 2012. "The price impact of order book events: market orders, limit orders and cancellations," Quantitative Finance, Taylor & Francis Journals, vol. 12(9), pages 1395-1419, September.
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