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Modeling Bid and Ask Price Dynamics with an Extended Hawkes Process and Its Empirical Applications for High-Frequency Stock Market Data

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  • Kyungsub Lee
  • Byoung Ki Seo

Abstract

This study proposes a versatile model for the dynamics of the best bid and ask prices using an extended Hawkes process. The model incorporates the zero intensities of the spread-narrowing processes at the minimum bid–ask spread, spread-dependent intensities, possible negative excitement, and nonnegative intensities. We apply the model to high-frequency best bid and ask price data from U.S. stock markets. The empirical findings demonstrate a spread-narrowing tendency, excitations of the intensities caused by previous events, the impact of flash crashes, characteristic trends in fast trading over time, and the different features of market participants in the various exchanges.

Suggested Citation

  • Kyungsub Lee & Byoung Ki Seo, 2023. "Modeling Bid and Ask Price Dynamics with an Extended Hawkes Process and Its Empirical Applications for High-Frequency Stock Market Data," Journal of Financial Econometrics, Oxford University Press, vol. 21(4), pages 1099-1142.
    • Handle: RePEc:oup:jfinec:v:21:y:2023:i:4:p:1099-1142.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbab029
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    More about this item

    Keywords

    bid–ask spread; exchange; Hawkes process; high-frequency trading; stock market;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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