Articlebronze2016

HYDRODYNAMIC LIMIT OF ORDER-BOOK DYNAMICS

23 citations0/0 files storedProbability in the Engineering and Informational Sciences

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Stochastic processes and financial applications Stochastic processes and statistical mechanics Complex Systems and Time Series Analysis

Abstract

In this paper, we establish a fluid limit for a two-sided Markov order book model. The main result states that in a certain asymptotic regime, a pair of measure-valued processes representing the “sell-side shape” and “buy-side shape” of an order book converges to a pair of deterministic measure-valued processes in a certain sense. We also test the fluid approximation on data. The empirical results suggest that the approximation is reasonably good for liquidly traded stocks in certain time periods.

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References

2003Limit Theorems for Stochastic Processes 1983Point Processes and Queues: Martingale Dynamics.1994Is the Electronic Open Limit Order Book Inevitable?2009A Dynamic Model of the Limit Order Book 2012Optimal trading strategy and supply/demand dynamics 2010A Stochastic Model for Order Book Dynamics 2009Optimal execution strategies in limit order books with general shape functions 1997Price variations in a stock market with many agents

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