Work

Hydrodynamic Limit of Order-book Dynamics

Year: 2016

Type: article

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.

Source: Probability in the Engineering and Informational Sciences

DOI: 10.1017/s0269964816000413

Authors: Xuefeng Gao, S.J. Deng

Institutions: Chinese University of Hong Kong, Georgia Institute of Technology

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

Funders: Chinese University of Hong Kong, Power Systems Engineering Research Center

Awards: G2008276077, G2203224842