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Modelling the shape of the limit order book

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  • Federico Platania
  • Pedro Serrano
  • Mikel Tapia

Abstract

This article develops a parsimonious way to use the shape of the limit order book to produce an estimate of the asset price. The posited model captures and describes the evolution of the distribution of limit orders on the bid and ask sides of the LOB during the trading session and provides estimates of the execution asset price over time. The performance of the model is evaluated against some existing standards from the market microstructure literature during the trading session. Empirical evidence on listed companies confirm a strong contribution of our methodology to the innovation in asset prices, according to the information share coefficients. We also document a significant improvement relative to the Hasbrouck [J. Finance, 1991, 46, 179–207] model when our model estimates are included as regressors.

Suggested Citation

  • Federico Platania & Pedro Serrano & Mikel Tapia, 2018. "Modelling the shape of the limit order book," Quantitative Finance, Taylor & Francis Journals, vol. 18(9), pages 1575-1597, September.
    • Handle: RePEc:taf:quantf:v:18:y:2018:i:9:p:1575-1597
    DOI: 10.1080/14697688.2018.1433312
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    Cited by:

    1. Qing-Qing Yang & Wai-Ki Ching & Jiawen Gu & Tak-Kuen Siu, 2020. "Trading strategy with stochastic volatility in a limit order book market," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 277-301, June.
    2. Lahmiri, Salim & Bekiros, Stelios, 2020. "Nonlinear analysis of Casablanca Stock Exchange, Dow Jones and S&P500 industrial sectors with a comparison," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 539(C).
    3. Mynbaev, Kairat, 2020. "Using full limit order book for price jump prediction," MPRA Paper 101684, University Library of Munich, Germany.

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