Continuous-time Modeling of Bid-Ask Spread and Price Dynamics in Limit Order Books
We derive a continuous time model for the joint evolution of the mid price and the bid-ask spread from a multiscale analysis of the whole limit order book (LOB) dynamics. We model the LOB as a multiclass queueing system and perform our asymptotic analysis using stylized features observed empirically. We argue that in the asymptotic regime supported by empirical observations the mid price and bid-ask-spread can be described using only certain parameters of the book (not the whole book itself). Our limit process is characterized by reflecting behavior and state-dependent jumps. Our analysis allows to explain certain characteristics observed in practice such as: the connection between power-law decaying tails in the volumes of the order book and the returns, as well as statistical properties of the long-run spread distribution.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rama Cont & Adrien De Larrard, 2013. "Price Dynamics in a Markovian Limit Order Market," Post-Print hal-00552252, HAL.
- Nikolaus Hautsch & Ruihong Huang, 2009.
"The Market Impact of a Limit Order,"
SFB 649 Discussion Papers
SFB649DP2009-051, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2008. "Relation between bid-ask spread, impact and volatility in order-driven markets," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 41-57.
- Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Quantitative Finance, Taylor & Francis Journals, vol. 2(4), pages 251-256.
- Ilija Zovko & J Doyne Farmer, 2002. "The power of patience: a behavioural regularity in limit-order placement," Quantitative Finance, Taylor & Francis Journals, vol. 2(5), pages 387-392.
- Potters, Marc & Bouchaud, Jean-Philippe, 2003. "More statistical properties of order books and price impact," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 133-140.
- Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Science & Finance (CFM) working paper archive 0203511, Science & Finance, Capital Fund Management.
- Kirilenko, Andrei & Sowers, Richard B. & Meng, Xiangqian, 2013. "A multiscale model of high-frequency trading," Algorithmic Finance, IOS Press, vol. 2(1), pages 59-98.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:1310.1103. 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: (arXiv administrators)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.