Demand Storage, Market Liquidity, and Price Volatility
The limit order book is a device for storing demand and effecting trades that is the primary mechanism for price formation in most modern financial markets. We study the limit order book under a random process model of order flow, using simulations and an analytic treatment based on a master equation. We make testable predictions of the price diffusion rate, the depth of stored demand vs. price, the bid-ask spread, and the price impact. Our model provides an explanation for the empirically observed concave form of the price impact function.
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| Length: | |
| Date of creation: | Jan 2002 |
| Date of revision: | |
| Handle: | RePEc:wop:safiwp:02-01-001 |
| Contact details of provider: | Postal: Web page: http://www.santafe.edu/sfi/publications/working-papers.html More information through EDIRC
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"Analyzing and modeling 1+1d markets,"
Physica A: Statistical Mechanics and its Applications,
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