Reduced form modeling of limit order markets
This paper proposes a parametric approach for stochastic modeling of limit order markets. The models are obtained by augmenting classical perfectly liquid market models with a few additional risk factors that describe liquidity properties of the order book. The resulting models are easy to calibrate and to analyse using standard techniques for multivariate stochastic processes. Despite their simplicity, the models are able to capture several properties that have been found in microstructural analysis of limit order markets. Calibration of a continuous-time three-factor model to Copenhagen Stock Exchange data exhibits, for example, mean reversion in liquidity as well as the so-called crowding out effect, which influences subsequent mid-price moves. Our dynamic models are also well suited for analysing market resilience after liquidity shocks.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 12 (2012)
Issue (Month): 7 (April)
|Contact details of provider:|| Web page: http://www.tandfonline.com/RQUF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RQUF20|
When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:12:y:2012:i:7:p:1025-1036. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.