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How does latent liquidity get revealed in the limit order book?

Author

Listed:
  • Lorenzo Dall’amico

    (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

  • Antoine Fosset

    (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

  • Jean-Philippe Bouchaud

    (SPEC - UMR3680 - Service de physique de l'état condensé - IRAMIS - Institut Rayonnement Matière de Saclay (DRF) - CEA - Commissariat à l'énergie atomique et aux énergies alternatives - Université Paris-Saclay - Université Paris-Saclay - CNRS - Centre National de la Recherche Scientifique)

  • Michael Benzaquen

    (LadHyX - Laboratoire d'hydrodynamique - X - École polytechnique - CNRS - Centre National de la Recherche Scientifique)

Abstract

Latent order book models have allowed for significant progress in our understanding of price formation in financial markets. In particular they are able to reproduce a number of stylized facts, such as the square-root impact law. An important question that is raised-if one is to bring such models closer to real market data-is that of the connection between the latent (unobservable) order book and the real (observable) order book. Here we suggest a simple, consistent mechanism for the revelation of latent liquidity that allows for quantitative estimation of the latent order book from real market data. We successfully confront our results to real order book data for over a hundred assets and discuss market stability. One of our key theoretical results is the existence of a market instability threshold, where the conversion of latent order becomes too slow, inducing liquidity crises. Finally we compute the price impact of a metaorder in different parameter regimes.

Suggested Citation

  • Lorenzo Dall’amico & Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2019. "How does latent liquidity get revealed in the limit order book?," Post-Print hal-02323373, HAL.
    • Handle: RePEc:hal:journl:hal-02323373
    DOI: 10.1088/1742-5468/aaf10e
    Note: View the original document on HAL open archive server: https://hal.science/hal-02323373
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    Citations

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    Cited by:

    1. Helder Rojas & Artem Logachov & Anatoly Yambartsev, 2023. "Order Book Dynamics with Liquidity Fluctuations: Asymptotic Analysis of Highly Competitive Regime," Mathematics, MDPI, vol. 11(20), pages 1-24, October.
    2. Jean-Philippe Bouchaud, 2021. "The Inelastic Market Hypothesis: A Microstructural Interpretation," Papers 2108.00242, arXiv.org, revised Jan 2022.
    3. Sandra Ferreruela & Daniel Martín, 2022. "Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach," JRFM, MDPI, vol. 15(7), pages 1-29, July.
    4. Mohammed Salek & Damien Challet & Ioane Muni Toke, 2023. "Price impact in equity auctions: zero, then linear," Working Papers hal-03938660, HAL.
    5. Fr'ed'eric Bucci & Iacopo Mastromatteo & Michael Benzaquen & Jean-Philippe Bouchaud, 2019. "Impact is not just volatility," Papers 1905.04569, arXiv.org.
    6. Michele Vodret & Iacopo Mastromatteo & Bence T'oth & Michael Benzaquen, 2020. "A Stationary Kyle Setup: Microfounding propagator models," Papers 2011.10242, arXiv.org, revised Feb 2021.
    7. Jean-Philippe Bouchaud, 2024. "The Self-Organized Criticality Paradigm in Economics & Finance," Papers 2407.10284, arXiv.org.
    8. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Working Papers hal-02998555, HAL.
    9. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2021. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Post-Print hal-02998555, HAL.
    10. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Endogenous Liquidity Crises," Working Papers hal-02567495, HAL.
    11. Michele Vodret & Iacopo Mastromatteo & Bence Tóth & Michael Benzaquen, 2020. "A Stationary Kyle Setup: Microfounding propagator models," Working Papers hal-03016486, HAL.
    12. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Endogenous Liquidity Crises," Post-Print hal-02567495, HAL.
    13. Michele Vodret & Iacopo Mastromatteo & Bence Tóth & Michael Benzaquen, 2021. "A Stationary Kyle Setup: Microfounding propagator models," Post-Print hal-03016486, HAL.
    14. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2019. "Endogenous Liquidity Crises," Papers 1912.00359, arXiv.org, revised Feb 2020.
    15. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Papers 2005.05730, arXiv.org.
    16. Frédéric Bucci & Iacopo Mastromatteo & Michael Benzaquen & Jean-Philippe Bouchaud, 2019. "Impact is not just volatility," Post-Print hal-02323182, HAL.

    More about this item

    Keywords

    models of financial markets; market impact; market microstructure; quantitative finance; agent-based models;
    All these keywords.

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