- Working Paper
We propose an analytically tractable class of models for the dynamics of a limit order book, described as the solution of a stochastic partial differential equation (SPDE) with multiplicative noise. We provide conditions under which the model admits a finite dimensional realization driven by a (low-dimensional) Markov process, leading to efficient methods for estimation and computation. We study two examples of parsimonious models in this class: a two-factor model and a model in which the order book depth is mean-reverting. For each model we perform a detailed analysis of the role of different parameters, study the dynamics of the price, order book depth, volume and order imbalance, provide an intuitive financial interpretation of the variables involved and show how the model reproduces statistical properties of price changes, market depth and order flow in limit order markets. Show more
Journal / seriesarXiv
Pages / Article No.
Organisational unit03845 - Teichmann, Josef / Teichmann, Josef
09546 - Larsson, Martin (ehemalig) / Larsson, Martin (former)
163425 - Tractable Stopping Problems in Finance (SNF)
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