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 |
| Handle: | RePEc:wop:safiwp:02-01-001 |
| Contact details of provider: | Postal: 1399 Hyde Park Road, Santa Fe, New Mexico 87501 Web page: http://www.santafe.edu/sfi/publications/working-papers.html More information through EDIRC
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References listed on IDEAS
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- J. Doyne Farmer, 2002.
"Market force, ecology and evolution,"
Industrial and Corporate Change,
Oxford University Press, vol. 11(5), pages 895-953, November.
- J. Doyne Farmer, 1998. "Market Force, Ecology, and Evolution," Research in Economics 98-12-117e, Santa Fe Institute.
- J. Doyne Farmer, 1999. "Market Force, Ecology, and Evolution," Computing in Economics and Finance 1999 651, Society for Computational Economics.
- Challet, Damien & Stinchcombe, Robin, 2001. "Analyzing and modeling 1+1d markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 300(1), pages 285-299.
- Damien Challet & Robin Stinchcombe, 2001. "Analyzing and modelling 1+1d markets," Papers cond-mat/0106114, arXiv.org, revised Jun 2001.
- Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-137, February. Full references (including those not matched with items on IDEAS)
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