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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 US 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.

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  • Kyungsub Lee & Byoung Ki Seo, 2022. "Modeling bid and ask price dynamics with an extended Hawkes process and its empirical applications for high-frequency stock market data," Papers 2201.10173, arXiv.org.
    • Handle: RePEc:arx:papers:2201.10173
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    File URL: http://arxiv.org/pdf/2201.10173
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    References listed on IDEAS

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    1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
    2. Aldrich, Eric M. & Friedman, Daniel, 2017. "Order protection through delayed messaging," Discussion Papers, Research Professorship Market Design: Theory and Pragmatics SP II 2017-502, WZB Berlin Social Science Center.
    3. Marco Avellaneda & Sasha Stoikov, 2008. "High-frequency trading in a limit order book," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 217-224.
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    Cited by:

    1. Konark Jain & Nick Firoozye & Jonathan Kochems & Philip Treleaven, 2023. "Limit Order Book Dynamics and Order Size Modelling Using Compound Hawkes Process," Papers 2312.08927, arXiv.org, revised Mar 2024.
    2. Kyungsub Lee, 2022. "Application of Hawkes volatility in the observation of filtered high-frequency price process in tick structures," Papers 2207.05939, arXiv.org.
    3. Kyungsub Lee, 2023. "Multi-kernel property in high-frequency price dynamics under Hawkes model," Papers 2302.11822, arXiv.org.

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